The ACD Method

HPY to all!

@Maverick74 : Mav, in a few previous posts you mentioned spreads have convexity and thus resemble options. I took away that bull/bear spreads are better ways to call long/short over flat price. I'd like to get your thoughts(and anyone else's) on why for example NG prompt month is at 1yr highs, but H7-J7 is not. I understand the collapse in the widowmaker in mid Oct due to weather and the subsequent rally because of again, weather, but if a bull spread is essentially a call, should the widowmaker not be higher?

You mentioned at lower absolute NG prices the spread(H7-J7) would act much differently(delta <1, convexity) vs a higher absolute price(delta=1), I'm wondering if what I'm seeing in the widowmaker is just that? Essentially the full daily changes, and not the flat price movement?
 
jj90 said:
HPY to all!

@Maverick74 : Mav, in a few previous posts you mentioned spreads have convexity and thus resemble options. I took away that bull/bear spreads are better ways to call long/short over flat price. I'd like to get your thoughts(and anyone else's) on why for example NG prompt month is at 1yr highs, but H7-J7 is not. I understand the collapse in the widowmaker in mid Oct due to weather and the subsequent rally because of again, weather, but if a bull spread is essentially a call, should the widowmaker not be higher?

You mentioned at lower absolute NG prices the spread(H7-J7) would act much differently(delta <1, convexity) vs a higher absolute price(delta=1), I'm wondering if what I'm seeing in the widowmaker is just that? Essentially the full daily changes, and not the flat price movement?
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The convexity is "unique" to HJ. Other spread months don't behave that way. This is due to the seasonality effect and end of season storage. HJ is acting like an option. It has a decay to it and will continue to decay going into the Feb delivery. But like all options, it also has a volatility component. Meaning if underlying prices get volatile then HJ can very quickly respond. The front month spreads other then HJ are not option like since they are more symmetrical meaning they are equally as likely to go positive and negative. At expiration or delivery, they will converge to the cost of storage.
 
Maverick74 said:
The convexity is "unique" to HJ. Other spread months don't behave that way. This is due to the seasonality effect and end of season storage. HJ is acting like an option. It has a decay to it and will continue to decay going into the Feb delivery. But like all options, it also has a volatility component. Meaning if underlying prices get volatile then HJ can very quickly respond. The front month spreads other then HJ are not option like since they are more symmetrical meaning they are equally as likely to go positive and negative. At expiration or delivery, they will converge to the cost of storage.
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I think I understand you. So HJ is more volatile because of the vol component, and convex, but nevertheless it is still a spread. So while prompt month is still relatively(today) at 1 yr highs, virtually all the winter front month spreads are at 1 yr lows because of today's news(warm weather). Would this thinking be correct?

And to further add, while HJ is a good way to express views on a rising price because of the convexity, in the end the usual fundamentals governing spread relationships still hold(converge to cost of storage)?
 
jj90 said:
I think I understand you. So HJ is more volatile because of the vol component, and convex, but nevertheless it is still a spread. So while prompt month is still relatively(today) at 1 yr highs, virtually all the winter front month spreads are at 1 yr lows because of today's news(warm weather). Would this thinking be correct?

And to further add, while HJ is a good way to express views on a rising price because of the convexity, in the end the usual fundamentals governing spread relationships still hold(converge to cost of storage)?
More...

HJ is a storage play. You need to get out a sheet of paper and draw out the value chain so you know what effects what and in what order. Degrees drive demand...demand pulls from storage...flow from storage derives price. For spreads...first leg of spread....degrees drive demand at time t...demand pulls from flow at time t, flow from time t derives supply at time T, supply at time T derives 2nd leg of spread.
 
Zodiac4u said:
Thin markets are great, but that's a me thing. I do have a question for you, why do you have a MACD and Histogram? After all they cross at the same time, so it makes for a redundant match. Just curios, I just have never experienced any value in having them both together. Cheer's:thumbsup:
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I actually only have the histogram on my charts. These screenshots were from my iPhone which I only use to check price, no trading decisions, so I didn't bother trying to change the standard setup.
 
justrading said:
I actually only have the histogram on my charts. These screenshots were from my iPhone which I only use to check price, no trading decisions, so I didn't bother trying to change the standard setup.
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All good, Thanks for responding.
I think most people just don't realize that the MACD and Histogram are the same, and to add a further note, all popular indicators are a byproducts of the Moving average. I'm not exactly sure who was first? ma's, Vwap, BBands, stochastics, Histo's, and macd. Just a firm belever that way less is better. cheers:thumbsup:
 
Zodiac4u said:
All good, Thanks for responding.
I think most people just don't realize that the MACD and Histogram are the same, and to add a further note, all popular indicators are a byproducts of the Moving average. I'm not exactly sure who was first? ma's, Vwap, BBands, stochastics, Histo's, and macd. Just a firm belever that way less is better. cheers:thumbsup:
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It should be properly noted that any man, woman or child who puts that stuff on their screens while using ACD will be severely reprimanded by the ACD Trading Gods. :)
 
LOL, the Trading Gods spake unto me and said "Thou shalt not use NL confirmations as entry signals". I asked what then and they replied "Whatever floats your boat and puts shekels in your bank account".

Seriously though, if you use crossovers as signals, you are going to be sorely disappointed, it's a lot more nuanced than that. I just happen to be very familiar with MACD because the very first book I read was by Alexander Elder and he touts this. I've been using it for years, and no the settings on the screenshot are not what I use. Those are crap standard settings and as I said, I just stuck it up on the iPhone without modifying it. Follow at your peril.
 
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