I haven't read this thread. So I'm going to post something here that I think is worthwhile noting and then just step back and wait for the flame throwers to arrive. I want to point out that the word "spread" is traders' jargon for the word "difference." Every time a trader uses the word "spread," we, as intelligent, educated human beings, can replace it in our minds with the word "difference." So, for example, the bid-ask spread, becomes the bid-ask difference. Subtract the bid from the ask and you have the difference or "the spread". If a trader says, "I'm trading the spread," he is trading a difference. Between what, who knows? You either have to tell from the context of the conversation, in which case you must fall back on your experience, or else you'll have to ask. If you have to ask, some jerk will call you a dumb ass for asking. There are all kinds of "spreads," i.e., differences, that are traded. There are equity price spreads between two related stocks that typically move parallel to each other. There are interest rate spreads between two related interest bearing instruments, there are futures spreads between contracts with different expiration dates, there are "calendar spreads" between prices of options with different expiration dates, Bla Bla Bla. Any difference you can think off is a spread, and any difference you can think of that might widen or narrow is a candidate for a spread trade. You could also go long one instrument and short another related instrument. That's another kind of difference, the difference between long and short. Each spread trade represents an equal opportunity event to lose money. So "spread" by itself, and taken out of context, is just as useful as another word from traders jargon, "liquidity." Liquidity use to mean the ease with which you could buy or sell a financial instrument. If there were lots of buyers or seller, we would say that instrument, stock, bond, whatever, is "liquid." Nowadays, however, the word "liquidity" has become more of an all purpose word useful whenever vagueness is called for -- "the fed is injecting liquidity", etc. Just pepper your conversation with the words "spread" and "liquidity," and you'll sound knowledgeable to someone. If you wasted your time by reading this far, than you probably want to know what my point is. It's this. Whenever we use jargon, if we are truly interested in communicating, we ought to be clear. Please don't say, "I am trading option spreads." Say instead, i'm trading option expiration spreads," or whatever, but be clear. Gentlemen light your flame throwers.
1. This is why I very politely decline taking on new clients with no relevant trading experience - in this case with futures. Properly constructing modeling and trading futures spreads requires solid baseline knowledge. What I do works best when I can take a somewhat experienced futures trader - and teach him or her in intimate detail the specialty of inter and intra market spread trading. I can't take the time to teach someone how a DOM works or how to read a clearing statement. I need to get straight to the sex part. 2. There are some really misplaced to downright awful assumptions about spread trading floating around in the broader trading community. Seasonality as a spread variance driver and grain spreads in particular are maybe five percent of the available futures spreads universe. The prompt month futures calendar pair roll spread trade is maybe ten percent of the available futures spreads universe. In fact, unless I'm trading an Inter market spread like Fives to Tens or Unleaded Gasoline to Crude Oil - I personally avoid the prompt three months to be perfectly honest about it. 3. A properly constructed spread trade will require very highly correlated instruments ( > 95 percent positive correlation Daily close-on-close with minimal cointegration). The spread trader hopes to profit through the convergence or divergence between these highly correlated instruments. An example of an Inter market spread might be the Dow Jones Index versus the Russell 2000 Index on a weighted, ratio'ed basis. An example of an Intra market spread might be a Dec 20 - Mar 21 - Jun 21 Natural Gas Butterfly (1-2-1). In each of these spread examples we are weighting each instrument for volatility because it is our desire to profit from convergence or divergence between instruments - and not expose ourselves to the delta directionality of the broad market (sometimes it can't be avoided, but that's the general goal). 4. The volatility and trading range of the underlying instruments will determine the trader's holding timeframe. I have sat for several months on a Eurodollar Condor in order to take 25 full tics out of it. I don't mind because they are really dirt cheap to margin and that's the nature of the Eurodollar market. I have had a Gasoline Crack move $1500 in a day for a one lot. And all points in between. This is nice because every client has a different risk tolerance threshold and will start with different account capitalization. 5. If it is electronically available and it is exchange listed it is a spread trade candidate. There are many thousands of spread combinations. Some are obvious, some you've never heard of, and some require access to markets that are unobtanium for most mortals. I've got a few guys that spread Comex Gold on Globex against LME Daily Prompt Gold. DRW has a thousand employees and they arbitrage and spread trade everything conceivable. DRW spreads Crypto futures versus Crypto exchange products. DRW spreads financially settled OTC swaps versus futures. I used to trade Five Year Cash Treasuries on Cantor Fitzgerald and spread it against Ten Year Note futures because those were the most liquid Treasury markets overnight in Chicago. And I used to spread Euribor on LIFFE against Eurex Schatz and Bobl for the same reason. And just a royal shit ton of other stuff. So this idea that Corn, Wheat, and Bean seasonals and the June-Sept T-Bond roll is about the extent of spread trading is insanely ludicrous.
Spread trading is beyond the pale. When bone talks of literally thousands of spread combos, he means it. How liquid many of them are I do not know, but for years I have seen the whole gamut of funky spread combos in the margin update notices. Like these. Bone, are you sweating those changes? Hehe. I think you are not. But the point is, there are certainly a plethora of choices out there.
Most of the stuff I trade will have at least a 75% exchange SPAN margin credit. So, for example, if I am spreading A versus B, and the outright margin for A is $5500 and the outright margin for B is $4700; my margin requirement will be $5500 + $4700 X 0.25 = $2550. Most the spreads I trade have a SPAN margin less than $1K. BTW - exchanges have SPAN margin agreements between them. For example - if you want to spread the CME S&P 500 versus the ICE Russell 2000 they will automatically assign a margin credit. This is quite common amongst energy, stock index, and interest rates. But use an FCM who clears hedge funds and proprietary trading groups - because your typical discount broker doesn’t have a clue and their Risk Manager will also be clueless. If you want to trade a big boy trade use a big boy FCM. RJ O’Brien, Rosenthal Collins, and Advantage clear a shit ton of spread traders. Many Hedge Funds and a couple of the BIG proprietary trading firms (DRW) use Investment Banks for clearing because they have omnibus account capability and access to all kinds of markets (think OTC Swaps).
Love this! I wish I had read this somewhere 6 years ago. Good and useful post better that many on any trading forum!
I say trade a very cheap pair for learning purposes, and see how you like it. It's a great way to learn; let the market be your teacher. Watch the prices/spread; understand the why, how, and forces underpinning their movements. 1. http://www.gutenberg.org/files/60979/60979-h/60979-h.htm
Go to the CME Educational Section. They have excellent materials on spread trading that is also free. In fact - it's the best commonly available material you can find. Good primer from the CME on spread trading futures. footnote: I am personally not a big fan of spreading WTI versus Brent - the positive correlation has come way off the past several years and the cointegration tendencies have gone up (not good). But for the most part these are good, solid introductory concepts. The inter market complex spreads [for example, CL Dec 20-Mar21-Jun21, 1-2-1 Butterfly] {NG Jan21-Feb21-Mar21-Apr21 Condor} are the types of trade constructs where my own clients spend most of their time. https://www.cmegroup.com/education/...-futures-spreads/futures-spread-overview.html https://www.cmegroup.com/education/articles-and-reports/why-smart-money-trades-spreads-part-i.html
It's pretty weird there's not much information by google or youtube search.... I cannot find real examples of exchange supported spread tradings. Looks like not very popular frontier to retails yet....
Why ? Why ppl come and say "ok, I know nothing, please tell me everything". You want to trade but you don't want to do all the hard work ? So sorry, you won't be trading... I might be rude, but this story goes over and over again. Do your job... read, watch, test ideas. You don't know basics but want info about much more complicated stuff.