Correlations are great for trade signals, spreading risk, position size management, market tendencies and a few other things that someone may be into in today's markets. ET has had a few threads in the past 10 years about these topics but there didn't seem to be much conversation about such.
Eurodollar calander spreads seem to have very high correlation and cointegration along with good liquidity for a few years out. Having taken a first trade of this type lately( steepener for the last couple weeks in this stock rally), the commisions with IB $4.02 for a single spread and selling the bid and buying the ask, worst case, is a considerable fraction of the expected move. With zirp and a glance at a 10 year chart, well, this market isnt what it used to be. (That has been said many times on ET already)
hi wrbtrader thanks for your post i am thinking about futures pairs to spread trade against one another which have a high level of correlation. wheat vs wheat sugar vs sugar nasdaq vs s+p gilt vs bund btp vs oat cocoa vs cocoa currencies vs other currencies etc and surely many many other combinations ??
Yes, i see what you mean. I plotted +2015-2016-2016+2017 which is close to a +red-green-green+blue fly. The 1st leg is a steepener that loses a little and the 2nd half is the flattener that dominates. It trends about 25 bp.over the last year at $100 per bp. Thanks i will test my commissions and margin on this combo in IB's spreadtrader.
The narrow range for Eurodollar rates in this low interest rate environment combined with bid/ask spreads and commish for multi-leg strategies like flies/condors leaves little profit on these trades. Are you finding differently?
There is plenty of opportunity in the annual flies and condors. Some of them are volatile and the bid/ask spread is usually .005-.01 pts wide, not much of an impediment. $25 a point and commissions for IB are $20/RT.
When i have some time i will try to work up some charts of calander spreads and flys. I will post them in dollars varying around margin (low) for these contracts. It may help myself and others to see "whats in it for you" . Of course timeframe is a major influence there.
Personally, I start out looking at 2 years in terms of correlation timeframes and mining possible pairs. And I use common sense to further pare down the non-sensical stuff ( like rubber vs gold ). If you do not have access to a Bloomberg terminal, I would highly recommend CSI over MRCI. Also, really check these results using chart overlays - don't trust anyone's data at face value. Finally, use some short charting timeframe intervals with your overlays to check for viability, wandering, and cointegration-like tendencies. If the charts seem promising, I would then spend at least a few weeks looking at the product order books (market ladders are best) placed side-by-side on your execution platform. You should also expect to ferret through MANY of these possible combinations before you find something that inspires enough confidence to trade it live. Two of the most prominent strategies for these combinations are lead-lag and synthetic intramarket spreads. Good hunting and best of luck. This is indeed a very worthwhile endeavor if you have the drive and determination to put in the work. No free money anywhere - it all takes sweat equity and working smart and not just hard.