Trading spreads like outrights

actionzip54 · Jul 2, 2011

Hey guys Im a total noob to futures and have been doing a lot of study in the hopes of feeling comfortable enough to open a account and start trading futures. I have experience with the commodity markets, trading precious metals, but not with futures. I have made a fair amount of money in the metals and I am looking to branch out to trading CL.

Iv'e found a fairly simple strategy that Im pretty sure would make money. I, however, do not want to take the risk that would be associated with taking outright posistions. If I do this I will be starting with a small account size most likely 10k. I was wondering how well do bull (long front/short back) and bear spreads act in correlation with the outrights? Would I be an idiot for assuming I can trade a spread in substitute for the outright? Would the liquidity of the back contracts kill me with the small account?

oldtime · Jul 4, 2011

Well, 2 things, The mini contracts trade ok, check out QM.

As far as spreads go, I trade what's called the crack spread, which is the difference in price between CL and RB.

As far as calendar spreads, you would be better using options,

but I'm finding out the spreads are so wide I don't think I will do it any more.

bone · Jul 4, 2011

Quote from oldtime:

As far as calendar spreads, you would be better using options, but I'm finding out the spreads are so wide I don't think I will do it any more.

I trade the Nymex exchange-supported implied futures calendar spreads in CL, HO, RBOB... love 'em. Not sure where the 'options' part makes sense. ICE has Brent and GasOil calendars and the Gas/Oil crack spread in the exchange-supported implieds.

oldtime · Jul 5, 2011

yeah bone, I wasn't thinking right. I think what he wants is to put on a stable CL so he can spread something else against it.

I was thinking options to profit on the time decay, but like I said, I just shorted a CL put and the bid/ask spread is so wide I don't think I"ll do it again.

I'll have to check out those other spreads you're talking about.

bone · Jul 5, 2011

Quote from oldtime:

I'll have to check out those other spreads you're talking about.

We use them whenever and where ever available. STIRS, grains, ICE, Nymex.

Buy one cal and sell the other - butterfly. Buy two cals - condor. And the implieds will handle a stop limit order which is fantastic for risk controls.

actionzip54 · Jul 5, 2011

Quote from bone:

I trade the Nymex exchange-supported implied futures calendar spreads in CL, HO, RBOB... love 'em. Not sure where the 'options' part makes sense. ICE has Brent and GasOil calendars and the Gas/Oil crack spread in the exchange-supported implieds.

Cool, so it's not idiotic. Also, I'm not really a day trader. I plan on posistion trading and was just thinking spreads would be a good "lower" risk way to get started and get a "feel" for futures.

Bone, I see you in the Ag futures forum alot. Where can I find some good info to start learning about AG spreads a little. I've read a few books on spreads and was just wondering if there was anything specific to the grains I should read etc.

I'm I correct to assume that CL calendar spreads are less complicated than the Grain spreads?

bone · Jul 6, 2011

Quote from actionzip54:

Cool, so it's not idiotic. Also, I'm not really a day trader. I plan on posistion trading and was just thinking spreads would be a good "lower" risk way to get started and get a "feel" for futures.

Bone, I see you in the Ag futures forum alot. Where can I find some good info to start learning about AG spreads a little. I've read a few books on spreads and was just wondering if there was anything specific to the grains I should read etc.

I'm I correct to assume that CL calendar spreads are less complicated than the Grain spreads?

Risk is definitely lower in the preads, all things considered - look at the historical vol, trading ranges, and the way they trend. They are also really cheap to capitalize with the SPAN performance margin credits.

I wouldn't necessarily say that CL spreads are easier than Grains, just different. IMO, your best source of information is the exchange website - under product specs, educational materials, and resources sections.

hen12y · Jul 6, 2011

For the first 3 months of the year VaR on the arb (spread between WTI-Brent) was approx equal to the VaR on the flat price.

With Cushing stocks and on stats day we regularly saw TI going 50c one way, brent going 50c the other way, and the arb blowing out by $1

Generally yes, spreads have much lower risk, but be careful, there are always exceptions, and the volatility in the front spread could still catch you by surprise!

bone · Jul 6, 2011

The biggest piece of advice I could profer: do not fade spreads looking for mean reversion, also known in the equity pairs universe as convergence-for-difference. (CFD). Futures spreads feature heavy commercial order flow participation. Futures spreads trend very, very well. In many cases, better than the flat price future in terms of "noise" contaminating your entry signals.

pwrtrdr · Jul 6, 2011

Quote from hen12y:

For the first 3 months of the year VaR on the arb (spread between WTI-Brent) was approx equal to the VaR on the flat price.

With Cushing stocks and on stats day we regularly saw TI going 50c one way, brent going 50c the other way, and the arb blowing out by $1

Generally yes, spreads have much lower risk, but be careful, there are always exceptions, and the volatility in the front spread could still catch you by surprise!

Agrred, spreads are less volatile until they are not, although leverage is good and bid/ask spread is nice...... its all relative though

good post.