arb'ing indicies futures/etc

Discussion in 'Strategy Development' started by empee, Jan 17, 2006.

  1. empee



    Does anyone else do this. Sometimes they get out of whack. Of course as we learned from LTCM they could get more out of whack, but usually they dont and with stops they make decent trades. For example, I arb'd between YM and NQ today (long YM short NQ) and its up decent afterhours, the reason I did it is because YM is too oversold versus NQ.

    Even if I am wrong, the differential is so great that I have to see the differential shrink to make money.

    These trades arrive from time to time and seem like no brainers. Obviously if you are in a directional trade then you cant participate but I was curious if anyone else does this?

    Currently the position (ah on the yhoo miss) is trading at +115 per YM/NQ pair.

    I know there are pair traders, but I'm refering to specific indexes/components with futures or some sort of decent leverage. (Using options is more difficult because of greeks/etc)

    I say this because it seems the like least risky trade when they arrive yet hardly anyone talks about them. Why?
  2. kwancy


    I am currently researching on index arbitrage (I am a NYSE equity trader). There is this free online seminar from CME (lecturer: David Lerman, link:, go to education center, then CME equities (education seminar), Archived seminar next and the name of the video is "Trading CME e-mini future fair value"~40 min. long). The reason being for the existence of index arbitrage opportunity is the difference between the future and underlying cash index that is off the premium range (i.e., the time-value, $PREM).
    If you register to CME, which is free of charge, you can get to know how professional do index arbitrage between ES and SPY (or the entire S&P cash index), you only need to do one calculation before the market opens based on certain variables to determine the premium of the day (days to settlement, index dividend yield, short-term borrow rate, 90days-LIBOR). If you are to go to a website:, the calculation is even done for you so you do not have to compute the cash index dividend using your own spread-sheet. However, based on my observation, the SPY and ES are so liquid that 99.99% of the time it stays within the range (my personal guess is modern technology that does auto trading). Please tell me what other arbitrage that you have in mind that is feasible?:)

    Watch the video is much easier than reading the attached paper
  3. kwancy


    The premium of the liquid ES is always sitting in a tight range and so literally no arbitrage opportunities exist. However, one feasible arbitrage method is to focus on sector-specific futures (or even better, when individual stock futures products are offered at CME, then modern technology can once again reward market technicians), but the liquidity can be a problem because it may take a while to restore back to "normal" premium range. Anyhow, if anyone can think of any arbitrage methods, I sincerely appreciate any kind of discussion and share of information.
  4. alanm


    On what are you basing your premise that the spread is out of whack? If you look at the market for the component stocks after hours (not just the last trade), extrapolate that to how you feel the less-liquid related component stocks will react, and calculate the values, you end up with a number very close to where the futures are trading (at least that's what my quick bask-of-the-envelope calculation was around 17:00 ET).
  5. Pairs trading between future contract is almost a standard trade for statistical arbitrage. The following presentation was given at the Futures Expo in '05, it outlines a fairly standard ES/NQ pairs setup. I know the author (who is a long time CME member, used to be head of interest rate trading for HSBC).
  6. Pabst


    I suggest you closely examine the relationship between NDX and DJI back in 2000 before you assume this spread, as you stated, is a "no brainer."
  7. Pabst


    YM vs. ES is the only index "pair" that isn't completely apples and oranges. Without looking it up I don't know for sure but I assume all 30 Dow stocks are in the S&P 500. ER2 probably has no more than several common component stocks to ES and has NONE to either NQ or YM. On the other hand YM has only two stocks common to NQ. It's possible to butterfly YM-ES-NQ but it's a quadruple commission/slippage trade. These types of spreads are ridiculous in so far as there's ZERO edge.
  8. This thread is a giggler.

    The backside of any (too well known) pairs trade is a virtual discontinuity (don’t tell Don's Snake Oil buyers) . Not convergence.

    Though, there is still stat-arb in the world all day long if you know where to look.


  9. kwancy


    Alanm: Please explain more about your calculation of basket of envelope, I am sorry to ask but I don't really get it. Thanks

    Rufus 4000: Thanks for the Futures Pairs Arb. article, since I am a NYSE/AMEX trader, do you know any between stocks (or even ETFs) and futures arbitrage opportunities?
  10. empee


    im referring to NQ v Ym or YM v ES or NQ v ES etc, not ES vs cash index. I'm talking about pairs that are normally correlated.

    Pabst: a) I referred to using stops (ala what LTCM didnt do), b) I'm talking about the relative relationship. ES/NQ/YM move generically together. Today they were out of sync. It happens from time to time, however when it does its almost 100% right (its the highest percentage winning trade, even higher than reversals) I've seen yet hardly anyone talks about it.

    You can use different methods to measure, for example, distance from MAs, etc.

    Even when these go "out of sync" they tend to re-sync then go out of sync again, meaning there is a period most of the time where they syncronize and you can exit the trade.

    This really isnt any great secret, its just obvious sometimes like the pullback in DIA and versus QQQQ (less), that doesn't mean QQQQ doesn't bounce, but if it does DIA will bounce more, and if it sinks QQQQ will sink more.

    Of course its possible that it goes farther (as a pair trader knows) and thus you have stops, but to be honest I've yet to have the spread go wide enuff to stop me out and I've never had a losing trade. (The method I use to measure usually produces fewer than 6-8 trades per year) but so far all have been profitable.

    I say this because for a conservative porfolio you could arb the difference and still generate a decent return (generating returns in short-term yielding instruments while not in these trades) or using other strategies.

    So the point I'm making is why don't more ppl talk about this when the win rate is so high, is it because its not tradable everyday?

    Before you go tagging me you'll note I've posted more than once on the YM thread how YM/ES/NQ lead/lag each other from time to time.

    (I suppose you could arb those intraday but I look for bigger moves and am a swing trader).

    I'd also like to reinforce that yes I know there is the possibility of "black swans" or 9/11 events that could cause the spreads to widen before you can stop out, and I also note that I have stops (very very wide) in case an event does occur that allows one to stop out.

    So I'm not referring to holding this until they re-sync, there is a stop point.

    (I bring this up cause I'm not referrin gto a strat that generats +10 NQ, +10 NQ, +10 NQ, +10 NQ , -200 NQ points type examples).
    #10     Jan 17, 2006