I wonder how easy it would be to replicate those sorts of payoffs just by being long V2X/VIX with some TF/carry/mean reversion rules so you only go long when it's likely to be worth your while. GAT
That's a nice question, but IMHO you'd get a very different risk profile. Trend is probably not going to help in that kind of environments because after a long lasting quiet market you will get negative signals. Unless you use very short term lookbacks, it will take some time to adapt to new conditions and, by the time it does that, CTAs / RP will probably have already degeared. Carry is not going to help too, as VIX curve is usually very steep when markets are quiet, so you are probably going to have negative signals. Maybe value/mean reversion can be the only factor with positive signals in that kind of environment. I'm not saying that those kind of signals are useless: I have a strategy which also trades vol futures on exactly those signals. But it's something completely different than those funds are doing: it's not a (although imperfect) tail hedge, but a strategy aiming at harvesting the volatility risk premium by being short volatility most of the time.
Rob, Do you trade the full-size currency contracts or the micros? The micros give me more granularity but the commissioners are proportionally higher (at IB, 0.33 for the micro vs. 2.47 for the full size with the micros being one-tenth the contract size). I think the spreads are comparable--either exactly the same or slightly favoring the full-size contract whenever I check.
The cost difference between the micro and full-size currencies is not that great, but it's much greater between the mini and full-sized grain contracts. IB commissions are 2.82 for the full-size contracts vs. 1.90 for the minis (9.00 for the equivalent full size of 5 contracts). How to think about measuring the benefit of being able to take a position (and granularity of the position) against the commission cost?
I run a regular report to check if I should be trading full size or micros. Code: rob@TradingPC2:~/pysystemtrade/sysproduction/linux/scripts$ . interactive_controls 0: Trade limits 1: Position limits 2: Trade control (override) 3: Broker client IDS 4: Process control and monitoring 5: Update configuration Your choice? <RETURN for EXIT> 5 50: Auto update spread cost configuration based on sampling and trades 51: Suggest 'bad' markets (illiquid or costly) 52: Suggest which duplicate market to use Your choice? <RETURN for Back> 52 However this only works if I'm collecting data for both. As it happens, for FX I haven't looked at the micros since the FX contracts aren't really that big in risk terms. Just quickly checking the GBPUSD micro I can already see that this wouldn't meet my liquidity requirements The rule I use is, first exclude anything that doesn't meet my cost and liquidity requirements: Code: Maximum SR cost? <RETURN for default 0.01> Minimum contracts traded per day? <RETURN for default 100> Min risk $m traded per day? <RETURN for default 1.5> Then I basically choose the instrument with the lowest contract size (so micros, then minis, then full size). Here are a couple of examples Code: Current list of included markets ['ETHEREUM'], excluded markets ['ETHER-micro'] SR_cost volume_contracts volume_risk contract_size ETHEREUM 0.002750 176.0 16.71 95076.0 ETHER-micro 0.085866 661.0 0.13 201.0 Best market ETHEREUM, current included market(s) ['ETHEREUM'] The micros don't meet cost requirements or volume requirements, so we go full fat. Code: Current list of included markets ['SP500_micro'], excluded markets ['SP500'] SR_cost volume_contracts volume_risk contract_size SP500 0.000546 1035654.0 24946.50 24088.0 SP500_micro 0.000575 728398.0 1755.54 2410.0 Best market SP500_micro, current included market(s) ['SP500_micro'] Both markets meet the requirements but the micro obviously is preferred. As it happens, in this case the costs are almost identical. (note SP500 here is actually the e-mini - the full fat contract is delisted) Now of course there is a more sophisticated trade off to be had between costs and contract size. The sort of heuristics I use in this post would be useful. But this is very complex, since unless you're trading only a single instrument you really ought to make the decision jointly across all instrument selection decisions. However now I'm using the dynamic optimisation, this decision has become less critical, so I'm less interested in getting that decision right - I'm happy doing it in this relatively crude way. Rob
Which requirement is not met by GBPUSD micro? I don't have extensive price data, but right now the spread on the micro (March) is the same as the full contract.
No costs are fine (around 0.2 SR units, actually slightly cheaper than the full size contract) I don't think it meets liquidity requirements, although it's pretty close (average daily volume in risk terms is about $1.4 million per day). Rob
If spreads are tight, why do you think volumes are important? Are you worried that, in martet turmoils, liquidity could dry up?
Yes, but even in normal times spreads only show you what you are going to pay to trade if you aren't an excessively large part of the market. Consider an extreme situation where you spreads are tight as a gnats wotsit, but the volume is very low such that your trading would consitute 50% of the daily volume. Once you started to put that kind of order flow through the volume at the top of the order book would evaporate and the effective spread you are paying would widen to the point you could drive a whole bus full of gnats through it. Rob