Thank you Bone, lots to think about - certainly with regard to fading
With regard to back-testing spreads, what is considered best practice? Is there any literature you can point to that would be helpful?
Spread Trading Strategies
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Thank you Bone, lots to think about - certainly with regard to fading
With regard to back-testing spreads, what is considered best practice? Is there any literature you can point to that would be helpful?
I'm going to take a pass regarding publicly posting a comment on back-testing. I've found it to be a misunderstood and frequently abused methodology.
Fair enough. I suppose I was more asking about best practices with regard to looking at historical spread prices, as opposed to 'back-testing'.
Given the broad choices regarding roll dates and price adjustments, I was just wondering whether the same guidelines that typically apply for charting historical futures prices apply for spreads as well.
If any one else could chip in that would be fantastic; having a hard time finding anything on google right now.
On another note, are there any good forums/threads in addition to Elitetrader where people discuss current trade ideas for futures/spreads?
Yes, you can (and should) model spread differentials - that's the good news. But spread construction is really important - and modeling prompt expiry calendar spreads won't get you very far. Likewise - using rolled, consolidated futures data for dated forward curve data mining is quite limiting because it will mask opportunities in specific dated expiries.
In other words, you could use a generic rolled and consolidated first month versus third month; second month versus fourth month; etc. but that will not be the same as modeling specific expiries. You also have the problem where the prompt month(s) are dominated by spec order flows and the expiries further out on the curve are dominated by commercial order flows.
Look at the open interest in the forward curve:
https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_settlements_futures.html
https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_settlements_futures.html
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The Futures Condor. An intra market spread [same product, different month expiries] using four different futures contracts. An example might be: long CLN19, short CLQ19, short CLU19, long CLV19.
By historical norms, like a Futures Butterfly the Futures Condor was meant to either buy or sell "the wings".
In other words, to Buy a Condor: +A -B -C +D. Here, you are buying the same product but different expiries on the first and last expiry (the 'wings') and selling the second and third expiry.
To Sell a Condor: -A +B +C -D. Likewise, you are selling the same product but different expiries on the first and last expiry (again, the 'wings') and buying the second and third expiry.
You can also model and trade a four legged combination without conventional 'wings' like: +A -B +C -D, or -A +B -C +D. When I am trading these four legged 'hybrid Condor' combinations [my term] without conventional 'wings', I will execute two exchange supported calendar spread pairs. So, for example, I would trade (-A+B) and a (-C+D) in order to enter into my -A+B-C+D combination if that's the particular four legged hybrid 'condor' spread that I liked at the time.
Regardless, for each of these four examples I listed above you will indeed receive a generous SPAN margin credit from the trading exchange. The important point is that you are long two of those futures contracts and you are short two of those futures contracts. As a futures spread trader your P&L gains or losses are derived from the convergence or divergence of price between those contracts. It is not ideal for a spread trader to profit from broad market moves - if that were the goal the trader should just take outright directional risk and not bother with the more elaborate spread construction, modeling, and execution requirements. The intra market forward curve movement is actually quite dynamic and is driven by demand versus supply factors.
Here is a link to the Weekly EIA Reports:
https://www.eia.gov/petroleum/supply/weekly/
Here is a link to the Daily CME Nymex Crude Oil Futures Settlement. Note the open interest and traded volume in the forward curve expiries:
https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_settlements_futures.html
By historical norms, like a Futures Butterfly the Futures Condor was meant to either buy or sell "the wings".
In other words, to Buy a Condor: +A -B -C +D. Here, you are buying the same product but different expiries on the first and last expiry (the 'wings') and selling the second and third expiry.
To Sell a Condor: -A +B +C -D. Likewise, you are selling the same product but different expiries on the first and last expiry (again, the 'wings') and buying the second and third expiry.
You can also model and trade a four legged combination without conventional 'wings' like: +A -B +C -D, or -A +B -C +D. When I am trading these four legged 'hybrid Condor' combinations [my term] without conventional 'wings', I will execute two exchange supported calendar spread pairs. So, for example, I would trade (-A+B) and a (-C+D) in order to enter into my -A+B-C+D combination if that's the particular four legged hybrid 'condor' spread that I liked at the time.
Regardless, for each of these four examples I listed above you will indeed receive a generous SPAN margin credit from the trading exchange. The important point is that you are long two of those futures contracts and you are short two of those futures contracts. As a futures spread trader your P&L gains or losses are derived from the convergence or divergence of price between those contracts. It is not ideal for a spread trader to profit from broad market moves - if that were the goal the trader should just take outright directional risk and not bother with the more elaborate spread construction, modeling, and execution requirements. The intra market forward curve movement is actually quite dynamic and is driven by demand versus supply factors.
Here is a link to the Weekly EIA Reports:
https://www.eia.gov/petroleum/supply/weekly/
Here is a link to the Daily CME Nymex Crude Oil Futures Settlement. Note the open interest and traded volume in the forward curve expiries:
https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_settlements_futures.html
Do you have any views on Feeder Cattle calendar spreads at the moment? They seem to have blown out substantially (with April/May spread showing very different characteristics from May/August spread). Can you point to any resources that would be helpful in understanding this discrepancy?