I have not touched the energy spreads for a while, but my experience with other multi-legged spreads is that execution is very touchy. We have a fairly nice in-house HFT-based solution for it and still I am not happy with the quality of execution.
If you are market making then its absolutely all about liquidity and low round trips. As you said if you market make a spread with a large b/o spread and there is very little liquidity its sub optimal. When I used to market make I would very rarely trade any legs that had average daily volume sub 1000 contracts, otherwise you end up stuck in a position waiting for fills. What I used to do was find commodity products that traded enough for me to make a decent market in and get plenty of fills BUT there was not enough volume to attract the huge electronic market makers as it wasn't worth their while. That way you have a solid edge. You need $2 round turns ideally less to make this viable.
This is the sort of thing you will not see in any book/paper. In reality oil flys are traded as per your right-hand ladder, synthetically calendar to calendar. Say for example on that right hand ladder I wanted to buy the fly I would be bidding -91 and/or -92 depending on how badly I wanted the fill. You have correctly identified that stops are dangerous things if you are trading energy flys. As you say b/o spread can widen hugely outside the US session and a stop could be triggered causing you to get a very bad exit price or be legged. Bear in mind when you enter and exit flys you never pay up using a market order unless you are desperate to get out OR perhaps if you are swing trading and just want the fill. Most traders I have seen who trade these markets do not use a hard stop. It’s about bankroll management and your average price position. The pros use TT or CQG, you can link to an excel spreadsheet that uses mid-point figures to calculate spread values no matter how wide the b/o out of hours. To trade these spreads properly you have to decide what you average hold time is going to be. Are you going to hold them for days/weeks? Or are you going to hold them for a few hours to a couple of days? If it’s the former you can get away with a cheaper front end, some offer free, you can also get away with $4 round trips as you are holding for bigger targets. If it’s the latter you likely need TT pro or CQG spreader which will cost $1200pm min. You also need $2 round trips so you have to get specialist clearing.
We leg exchange calendars versus exchange calendars in order to make up our butterfly and condor intramarket futures positions. I strongly discourage my clients from legging individual expiries under any circumstance. With respect to the bid/ask spread, and under the conditions that we are swing trading these spreads, if we can split the bid/ask the slippage works fine in terms of our price targeting. If I can get my guys to generate great returns whilst avoiding the cost of TT AutoSpreader or CQG Integrated Client then that's a huge win. I also suggest to my greener clients that they used a big Chicago FCM with plenty of institutional and spec spread clientele. I suggest to these less experienced clients that they have their FCM's 24 hour execution desk execute their spread orders giving them a couple tics DRT if necessary. Seems to work fine for us - keep in mind that we swing trading and that might be a completely different approach than yours. YMMV.
here is an observation which my get a penny or two to drop. Why would you want to trade spreads like I posted above away from the front? As you can see from the 2 charts below outright oil has shat out aggressively last 2 days dropping the best part of $4. Contrast that with the daily price action on the above double fly spread I posted above. We stayed range bound albeit the POC moved down slightly yesterday but nothing out of the ordinary and very manageable in terms of risk. look at the price action of the daily profiles showing the last 10 days from 24th Jan, compared to the previous chart I posted earlier in this thread. not bad eh?
Yes the first chart does look like a mess (to me anyway). Looking at everyone's posts on spreads, mainly using a mean reversion range over multiple days (and longer), it does look much clearer. All of this started me reading all of Bone's posts last year, and yours and many of the others that volunteer their time to help others. Thank you.
... and yes the range looks much more manageable on the second chart. I don't know what the far history looks like on the left side of the the chart (continuous spread futures charts - I think Bone mentioned something ages ago?), but is it a more cost effective option for a retail person to hold this three days to a week each time? A 30 tick range absorbs a lot of those retail costs. At the moment it's mainly a learning exercise as I won't be touching these for a long while.
... ummm ... ok ... what's the cheapest way to chart these double flys with even bar or line charts? Is esignal the cheapest option for longer term continuous spread charts?
yes cheapest way is esignal or you can get a TT web demo. You cannot plot spreads like these in a continuous format like you can a prompt month future.