Spread Correlations

Ah, that sort of meaningless. The Excel fudges aren't helpful in your case (working with percentage changes of a spread value). Instead, I calculate the one-day returns (%) for each of the spread contracts, and subtract the second leg return from the first.

So, spread return = (1 day return of CL1) - (1 day return of CL2).
This formula will give you the return for holding long the front and short the deferred contract.

I can upload a simple Excel example if that's not clear.

I'm sure you probably know that if you're using the front month of many commods especially close to expiry then the correlations could get quite wacky and never return to base.
 
Quote from dunleggin:

Ah, that sort of meaningless. The Excel fudges aren't helpful in your case (working with percentage changes of a spread value). Instead, I calculate the one-day returns (%) for each of the spread contracts, and subtract the second leg return from the first.

So, spread return = (1 day return of CL1) - (1 day return of CL2).
This formula will give you the return for holding long the front and short the deferred contract.

I can upload a simple Excel example if that's not clear.

I'm sure you probably know that if you're using the front month of many commods especially close to expiry then the correlations could get quite wacky and never return to base.
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makes perfect sense, thanks for the idea.
 
I hear that by spread trading stocks in the same industry, the industry can underperform the benchmark(maybe SPY) and the performance of the benchmark itself
can be poor while you own the spread. All that going wrong and you can still profit with your spread.
What i would like to do is take a period of time say oct2008 to feb2009( meltdown of benchmarks and industries) and see if trading a hundred or so well known spreads produces results similar to a "good" market context.
This would somewhat contradict there are market contexts for long, short and range strategies. In a nutshell, that spread trading is not dependent on market or industry context.

This hypothesis is seperate from just being flatout wrong and , for example, having both legs go against you. I understand that risk.
How would one set up this test? Special software i suppose.
 
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