Spread Trading

Quote from MYDemaray:

I second nitro's suggestion for an ET chat on spreads featuring backwardation....I think that would be very helpful for all of us who are interested in learning more.

Nitro,

What are some good ways to learn stat arb? All the models I've looked at, I've found holes in. Is there a recommended resource?

Thanks,

mike d.
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MyDemaray,

There is a thread on ET on Pairs trading:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=8533

Although I do not agree with much that was said there, it is a reasonable place to look for some "tips."

nitro
 
There is an intersting article in the newest edition of SFO magazine about seasonal spreads entitled :
Are Seasonals Worth Anything in the Financial Markets? Soybeans, Heating Oil and Cattle, Yes, But Interest Rates and Equity Indices? by: Jerry Toepke
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Try link at http://www.sfomag.com
 
Thanks nitro. I've read through that thread before, and like you, wasn't too impressed. I'm trying to build a mathematical framework for spreading that factors in the volatility of each side...so that I remain volatility adjusted neutral. Trying to see if there is a mechanical approach to stat arb spreading over longer periods of time (days, weeks)....

Guess I'll keep searching. Thanks.
 
Quote from MYDemaray:

Thanks nitro. I've read through that thread before, and like you, wasn't too impressed. I'm trying to build a mathematical framework for spreading that factors in the volatility of each side...so that I remain volatility adjusted neutral. Trying to see if there is a mechanical approach to stat arb spreading over longer periods of time (days, weeks)....

Guess I'll keep searching. Thanks.
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One clue that I will suggest to you is "Cointegration."

nitro
 
This style of trading as we all know isn't all that popular with most futures traders, let alone traders in gen'l. Just yesterday i was explaining the approach to an equities trader whom is rather proficient......& i recieved alot of blank looks and and a reply,

"Commodities ?? Don't people lose their homes and have soybeans dumped on their lawns trading those things"

So in an effort to stimulate more chat and exchange of knowledge..guys don't forget theses sites (Sure, some of you know 'em already)

http://www.direct-equity.net/forum/display_forum_topics.asp?ForumID=5&PagePosition=1&ThreadPage=1

http://www.spreaderx.com/forum/default.asp


Best,

J-law
 
Conclusion - spread trading is not as easy as one might be lead to think.



I know a little late but wanted to chime in on this topic.

This style hands down is alot easier than staring into a screen for 8 hours at a clip trying to figure out which way the institutions and the specialist are going to run a stock and then fighting for the liquidity to get in or get whipsawed.

Or for that matter trading futures in the front month with the rest of the specs off of technicals in a leveraged instrument with no hedge.

Spreads give one the ability to harness a potential seasonal move that puts the proverbial "Wind at your back" & also to stop take a breath and contemplate your next move.

All without the in your face situation one may have when your directional, short and the market is ripping up in your face.

It's still trading with all the decision making dynamics and you can still take a bite in the ass. There isn't anyway to negate or circumvent the risk.

Just a better way to manage it. :p


Hope all are trading well,

J-Law (A lil late)
 
quote from J-Law :

Spreads give one the ability to harness a potential seasonal move that puts the proverbial "Wind at your back" & also to stop take a breath and contemplate your next move.

All without the in your face situation one may have when your directional, short and the market is ripping up in your face.

It's still trading with all the decision making dynamics and you can still take a bite in the ass. There isn't anyway to negate or circumvent the risk.
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When you trade with a directional bias ( long or short ), you can always hedge the position buy also buying options. But when you put on a spread how do you hedge it.

How do you protect yourself against an adverse move in the SN3/SX3 spread ?
 
When you put on a spread how do you hedge it.


When you have a spread on there is an inherent built in hedge, your opposing leg.

I'm sure there is a way to employ options to hedge yourself, but that comes at a cost, the Bid/ask spread, commissions, etc.

I have never really given the idea much thought mainly because of the above statement. If I was wrong I would get out and look to the next opportunity.

My opinion, I myself wouldn't try tp hedge a plain intramarket spread. I just earmark my risk before entering. The trade either works or it doesn't. Besides with a hedge you don't want to put one on to save a losing position. just liquidate and move on. (Not that you're implying that)

They may well be a way to hedge w/ options or even futures for that matter. Interest rate spreaders most notably in the eurodollars come up with all types of multi-leg spreads (Butterflies, colored packs.)
The question is would it be profitable from off the floor to engage in a spread that may have 3+ legs (other than straight cracks or crushes) ??

Bone may be able to chime in on this one.


Bone ...you there ???



J-Law
 
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