Spread trading newbie has questions.

This also could have happened to you if you were trading outrights in May '20 Crude Oil or June '11 Cotton. The fact that you were in a spread probably had very little to do with your circumstance - it was more about your choice of market and expiry.

I provide my clients with rules regarding minimum liquidity required and to be quite honest, we don't trade the prompt months for intra market spreads - especially if it's a physically settled contract. I've been doing this for a very long time - futures, OTC Swaps, Bilateral Physical, you name it.

narafa said:
Back in 2008, I lost over $120k in a single spread trade over the course of 1 week (it was the expiration week). It was partially my mistake, because I was holding a very large position in a relatively illiquid market and the 2008 general conditions even made it more illiquid and I didn't close out my position (Or even reduced it) until expiration was very close, so with 1 week to expiration, I was like pinned and I had to close out, someone on the other side took advantage of that and I was screwed of course.
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bone said:
Just to expand a bit on the exchange supported spreads. In terms of liquidity - when comparing best bid and best offer there is always more volume on the intra market exchange supported futures spread than there is in the outright market. It's true for Corn, it's true for Eurodollars, it's true for Crude Oil.

If you've got TT or CQG IC or another trading platform that shows implied orders you can easily compare.
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Agree, I shouldn't have generalized, but lack of liquidity in futures spreads is the norm rather than the exception. It's true that the likes of Corn and Crude Oil spreads are very liquid, but a lot others still are not, e.g. Palladium, Platinum, Gold, Silver, SoyMeal, etc..
 
bone said:
This also could have happened to you if you were trading outrights in May '20 Crude Oil or June '11 Cotton. The fact that you were in a spread probably had very little to do with your circumstance - it was more about your choice of market and expiry.

I provide my clients with rules regarding minimum liquidity required and to be quite honest, we don't trade the prompt months for intra market spreads - especially if it's a physically settled contract. I've been doing this for a very long time - futures, OTC Swaps, Bilateral Physical, you name it.
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Not true. The underlying commodity itself was not liquid as well, so goes without saying that the spreads were lacking liquidity, especially in 2008 and the massive liquidations/deleveraging which was happening back then.

But anyway, it was my choice of market & expiry, true.
 
Not at the CME or ICE or Eurex. The best bid and best offer in the exchange supported spread will almost always be more liquid than the outright flat price contract.

narafa said:
but lack of liquidity in futures spreads is the norm rather than the exception
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bone said:
Not at the CME or ICE or Eurex. The best bid and best offer in the exchange supported spread will almost always be more liquid than the outright flat price contract.
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You are tempting me :):). SoyMeal, Platinum, Palladium, SoyOil, Live Cattle, Hogs, etc...

But you are right, there are more liquid native spreads than I initially thought. I thought that it's Corn, Crude and NatGas are the ones with very liquid spreads. Turns out I am wrong, there are more.

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Any name with decent liquidity will have very good exchange supported spread volume. TBH, I tell my clients not to trade names like Platinum and Paladium or Oats. I keep them away from the thin markets as a rule. I give them minimum volume thresholds.

I do have a few clients who just freaking print money over at the LME - but that's another matter all together.

narafa said:
You are tempting me :):). SoyMeal, Platinum, Palladium, SoyOil, Live Cattle, Hogs, etc...
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Petermarkwood said:
Spread trading is difficult and complex but it is not utterly useless as per say. Spread trading can bring major benefits in times when the swing in the markets is not clearly defined. We know that the difference between particular legs can widen or shorten because anticipating the relative movement of two securities is easy. For example Tesla’s stock will go up but no one knows how long this upward trend would continue because of the emergence of companies such as Mercedes and Toyota with their own electric cars. We can anticipate more easily that the difference between the two will decrease in the future because both of the stock prices would increase.
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Trading style is different for everyone, maybe someone has found the holy grail of spread trading. So it is different for everyone; one cannot just straight away say that spread trading is bad because you never know maybe they haven’t figured it out yet while trading
 
Well, spread trading is really misunderstood and downright dismissed on this website - and yet it’s the bread and butter for the big proprietary trading groups like DRW and TransMarket and Peak6 and a shit ton of hedge fund and bank desks.

outhoe said:
Trading style is different for everyone, maybe someone has found the holy grail of spread trading. So it is different for everyone; one cannot just straight away say that spread trading is bad because you never know maybe they haven’t figured it out yet while trading
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