I'm not suggesting to use the individual outrights to leg in. It's just like buying a fly you buy one spread and then sell another spread. Except in this case it's a 1 month spread vs a 3 month spread. As soon as you get filled on the 1 month you generally get into the 3 month at market. Or you let it run a bit. I see it as 'bonus edge'. One example would be if I'm going long the 1 month and there's some momentum I'll lift it through and wait for a few ticks in the 3 month to get a better price. If it dosent I'm happy to just go to market on the 3 month. I'd suggest looking at a 1v6 month combo as they have larger ranges and commission is less of an issue.
Wh Ahh I see.. I didn't understand you...by 1x3 you mean 1 wide spread against three inside spreads... I've never looked at 6 month against insides... Are you saying 1x6 is one six month wide zm to a inside 1 month fly or just a inside cal
If I'm looking at a block of 6 months (in energy markets I'll trade in DecJun blocks) and I think... Hmm FebMar seems a little lower then the others I'll buy 6 FebMar spreads and sell 1 DecJun spread. What I'm saying is that relative to all the other spreads in DecJun I think that FebMar will rise more. So im essentially exposing myself to 6 long FebMar contracts and I'm short 1 of every spread within DecJun (including FebMar so really only 5 contracts of FebMar against 1 of each of the other 5 spreads in the DecJun group). Hope this makes sense. They're some of the most ranging mean reverting spreads I've found. For reference and to spur on a few more ideas in your head I've written out a fly guide in my journal that's towards the bottom of this page. http://www.elitetrader.com/et/index...living-as-a-professional-trader.241603/page-5
I will follow your journal .. but i'm not sure how you derive how one zm would offset six inside gh's ... This is a broader view on the relative slopes of the curve then i was expressing.. and i could see this making sense in certain situations, but if one contract is out of line in relation to the others then i don't believe spreading out further benefits as it brings into account more risk
I'm a chart trader at a basic level. Then alot of my edge comes from tape reading and being able to judge momentum. My biggest profits come from 1vs6 month combinations. Why? For a few reasons, theyre relatively cheap, 1 vs 6 is only 1/6 more expensive than putting on a straight spread trade. A fly would be twice as expensive as a straight spread and a double fly (entered with 2 fly trades) 4 times as expensive. They're flexible, you can job the 6 month around without commissions being a big issue. You can also shift them into Condors (by going the opposite way in another 1 month and exiting the 6 month piece) or hedge with 3v3 FLYs. When you think about risk think about costs first and foremost with spread trading unless you're looking at weekly/monthly time frames. If it costs you 4 ticks to get into a trade that risk is immediately slapped onto your net profit calculations. If you make 8 ticks on the average winner and lose 4 ticks on the average loser you're breakeven with a 50/50 ratio. That sucks! You need a ridiculous edge just to breakeven. There are so many trades I wouldn't consider with double my costs and so many I would with half my costs. Firstly chart all the 'decjun' combinations for 24 months down the curve. Try and see some patterns, theyll be pretty obvious. Then do the same thing with double FLYs or 1 vs 3 months. Sure there's a little more variance and bigger ranges with the 6 months, but once you take into account the flexibility and reduced costs this variance will be more than accounted for. Whether or not you logically believe what I'm describing is an actual 'hedge' I think you'll see a few ways to trade it after charting it and the benefits of a reduced commission. If you get good at trading these relationships then definately start trading at a prop firm. If you can make money with retail commissions you'll absolutely clean up with half the commission cost. I roughly make 2 times my commission cost net, if I were trading with your costs I'd make half what I do now. Relative to the guys in the office I have a ridiculous ratio as I'm longer term. It's all about costs with spread trading and finding the cheapest ways to put on trades.
Dumb question but what's an actual example of a 1vs6 month combo? Are talking dec/jun and then some other 1-month calendar on the other side (eg mar/feb)?
while in certain respects i agree with you , in others i think your going off in another direction... i'm not looking to trade spreads in some directional fashion.. This is pure dislocation between expiries.. This is not watching zm's and looking at the direction they are trading... this is trading differentiating slops on the curve that are directly adjacent , and leveraging a more complex structure to isolate slope from price level.. it sounds like to me you are trading more price .. with all your momentum talk.. just speculation on that though..
Yeah pretty much, so lets say I'm looking at the Dec16-Jun16. I'll take on six times a 1 month spread within that spread. I trade price, but I trade it based on the relative value to the other spreads within that 6 month block. So temporary dislocations. Mean reversion. If you're right up at the front of the curve there are a lot of other factors that come into play. Some random fundamental stuff. The interaction of all the other energy markets and their derivatives. In general I try to stay away from the front because there are too many unknown variables.