That's a pretty broad question. From my bias and perspective I think that spread traders will have to adapt over the next few years. To trade intermarket relationships that no one else is looking at. To start looking at a few more variables to base their trades on and take longer term trades to survive.
I guess some of the specifics might be: how have the various macro-effecting events we've had this year (of which we've had quite a few) affected the solidarity of people's trades as compared to previous years? In addition, maybe technology/execution/competitive factors such as the players in the playing field, increase in quant-driven trading, etc. One of my concerns is the "no one else is looking at" part. Who's to say that everything isn't already being looked at? Granted, the permutations are large, but they've got the resources.
That's an interesting point. I don't think you have to be the only one taking a position in some esoteric spread to be successful. There is probably some balance of needing enough market participants to join your position who propel it to move your way, versus too many participants in a crowded trade that arbs out any edge.
I would like to welcome a new client to my training rotation. You know who you are ( long-time ET'er )
2016 Natural Gas Butterfly was a very quick hitter. 2016 Grain Butterflies have been languishing in a trading range for a few weeks now, but are starting to move our way.
Sorry guys I should have gotten back to this earlier. It's given me time to think about my response. At my firm there are guys who are experts in the price action of their particular markets, the 'locals', every now and then something will come along and everyone will be the same way round in a trade. The outrights have just broken up 200 ticks and the Dec Dec spread is being iceberged against the move with huge size. What's usually a highly correlated move soon turns into one big trader holding all the cards and all the locals scrambling to get out. However, I've noticed at times that's this 'out of the norm' behaviour is due to intermarket relationships that none of the 'locals' are looking at. So, in my head you don't have to be looking at esoteric relationships, just developing more of an understanding of intermarket dynamics to be a step ahead of trapped traders just looking at one market and hopefully churn out a little extra edge. I mean more along the lines of scanning for big players in other correlated markets, waiting for trapped traders and exploiting relationships those traders aren't looking at. So its not what 'no one' is looking at just that 'most of the traders' aren't looking at. It's a work in progress
Bone, In your posts you've often mentioned that one of the positives of spreads is their lower margin. Have you sometimes found this to be a negative where people with think "great, lower margin now I can trade bigger size" which then comes to bite them when things (inevitably) go against them. Thanks
I encourage my clients to start out trading one lots live and to to lever from there. We also talk about levering when your account capitalization and trading record improvement dictate it. Clients will typically have a few to several positions on at once and in just about any product suite that is traded electronically, and of course, we swing trade. So I think that the implosion risk is lower for my clients who are following my advice. From my experience, implosion risk is more personality and emotional state oriented. YMMV
I would like to welcome another long time ET'er and options trader to my program. He hails from the great state of Texas.
Hi Bone, You've mentioned before that one advantage of spreads is the large number of them which gives you many more choices than with pure directional plays. I've seen you write about your use of OI to reduce the number of potential trade candidates. Still, given the large number of possible spreads (thousands) are you able to automate the reduction of this list to a manageable and somewhat prioritized set? Am not asking the mechanics of how you do it but rather do you have a method by which you accomplish this. I'd think that portfolio construction is a key factor in the success of any trading effort and especially so when you have such a large set of possible spreads to trade and that doing this manually would potentially lead to quite a lot of variance in results. Thanks