Spread Trading Strategies

[bone]

Quote from londonkid:

Bone - would it be possible to trade this price action manually legging in and out. Would slippage make this viable?

London

It is not advisable under any circumstance for you to be manually legging August versus December Nymex Crude Oil. You will get flipped and end up butchering it. That's my honest and sincere opinion. Not worth the tradecraft investment in terms of skills and concentration required.

The better strategy is to position trade that spread for longer timeframes. That spread is very cheap to carry overnight: The SPAN margin will be about $500 to carry a 1 x 1 overnight. Why carry it overnight ? Well, because it is obviously a very trendy and well-behaved spread to date:

I don't see the utility in doinking around with that particular spread intraday. Even scalping the exchange traded spread for August-December doesn't leave much meat on the bone so to speak. Remember, unless you are getting Member rates, paying commissions for round turns on each leg will cost you a tic for execution costs. Again, you asked for my opinion and there you have it:

 

[londonkid]

Quote from bone:

It is not advisable under any circumstance for you to be manually legging August versus December Nymex Crude Oil. You will get flipped and end up butchering it. That's my honest and sincere opinion. Not worth the tradecraft investment in terms of skills and concentration required.

The better strategy is to position trade that spread for longer timeframes. That spread is very cheap to carry overnight: The SPAN margin will be about $500 to carry a 1 x 1 overnight. Why carry it overnight ? Well, because it is obviously a very trendy and well-behaved spread to date:

I don't see the utility in doinking around with that particular spread intraday. Even scalping the exchange traded spread for August-December doesn't leave much meat on the bone so to speak. Remember, unless you are getting Member rates, paying commissions for round turns on each leg will cost you a tic for execution costs. Again, you asked for my opinion and there you have it:

thanks for the reply Bone. If a trader wants to trader spreads intraday what type of spreads would you recommend.

would you go for the exchange traded spreads to minimize transaction costs and legging risk?

 

[bone]

Quote from londonkid:

thanks for the reply Bone. If a trader wants to trader spreads intraday what type of spreads would you recommend.

would you go for the exchange traded spreads to minimize transaction costs and legging risk?

Definitely the exchange traded spreads in terms of major exchange futures products. Just don't clear IB for reasons already discussed earlier in the thread.

 

[bone]

Stock Index Futures Spread Trading:

http://www.cmegroup.com/trading/equity-index/files/SP500_DJIA_Spreads_Final.pdf

InterMarket Stock Index Spreads:

http://www.cmegroup.com/trading/equity-index/files/Stock_Index_Spreading_0410.pdf

Some sort of CME presentation apparently done for Interactive Brokers:

http://www.interactivebrokers.com/download/en/CME_Power_of_Pairs.pdf

Note: It gets much more complex than this in a hurry. But like all things trading, Occam's Razor is appropos. Streamlined approaches make money.

 

[bathrobe]

Thanks bone for those PDF's I want trade more Calendar spreads because of the trending relationship and low margin requirements.

First off 99.999% of my trading as of now is outrights but I would like to look for spread opportunities because of the obvious reasons like margin and trending.

I have a very stupid question regarding this but I will assume no question is stupid: the screenshot I used is old and from another thread of mine but the cal spread dom is very dense so when you get filled at let's say -53 I am guessing it can't be working long May and Short June at a -53 cent spread because the outrights are so thin often having less than 15 bids/offers at a price, so I am left thinking each calendar spread is it's own market but I just don't know and the more I think about it the more confused I get.

Thanks

 

[2rosy]

Quote from bone:

Definitely the exchange traded spreads in terms of major exchange futures products. Just don't clear IB for reasons already discussed earlier in the thread.

why no IB? i dont see it in this thread

 

[bone]

Quote from bathrobe:

... but the cal spread dom is very dense so when you get filled at let's say -53 I am guessing it can't be working long May and Short June at a -53 cent spread because the outrights are so thin often having less than 15 bids/offers at a price, so I am left thinking each calendar spread is it's own market but I just don't know and the more I think about it the more confused I get.

The exchange supported spread markets are almost universally more populated throughout the order book than the outright futures ( the individual leg components ). The Eurodollars are an extreme example of this, where in the near term forward curve there can be over 10K on the best bid and ditto for the best offer.

I think it is OK to think of the spread market as it's own market that is completely fungible into the outrights. Even on the floor many years ago, the spreads were always quoted with considerably more volume than you could find quoted in the outrights.

You want to use the exchange spreads wherever available, and resist the urge to leg into and out of spreads manually or even with automated execution software. The slippage risk and exchange messaging restrictions is simply not worth it, and the opposing automation will pick you off and flip you. That is my personal opinion based upon years of experience.

 

[bone]

Quote from 2rosy:

why no IB? i dont see it in this thread

IB apparently does not support exchange spreads amongst their clients. To date, every client that comes to me clearing IB switches clearing firms. That is what I personally know to be true, and if IB wants to correct me by all means please speak up.

 

[njrookie1]

bone:

I disagree. I have traded native future calendar spreads with IB. It works fine as "exchange directed spread".

A separate question: should I worry about smaller FCM steal or piggyback my spread strategies? I am more comfortable with IB in that regard.

Another question: any platform that supports REL orders for future spread?

njrookie

 

[TheBlackHand]

I trade through Velocity. One reason bone probably suggests using a well established FCM (GCM perhaps) is that they will have institutional level service compared to a smaller introducing firm like Velocity.

You notice the difference when you have to call the (Velocity) desk for a quote or get out. It will take the desk 5mins + to find the spread you're interested in - while it can be moving quickly if calling near the close.

I used to trade through a broker who was a GCM where retail and institutions would get the same desk. Given institutions trade a lot of spreads, the brokers would have ALL spreads up whenever, so it would take them ~1 min to get done what you needed doing. That was MFG (a great firm except the boss)!

Velocity are ok if you just want to punt round day trading or outrights, but spreads - hmmm. Of course you pay a bit more with a GCM usually.