Now THAT is interesting. So if it is a YM/ES move, and the ES moves with the YM...The YM moves, say, 5 ticks, but the ES moves 2 ticks, you have 25 bux versus 50 bux. Jeez. I wish I met you before my other mentor. I do not have the dosh to learn from you, but spreads are fascinating.
Just about every big futures or options prop trader is trading some sort of spread - Swaps, futures, market making hedge, any arbitrage
Hi. If you look at the chart again under the symbol entry field, it says the expression that defines the spread. It is 40*/NQ-15*/YM which is long 2 E-Mini Nasdaq and short 3 Mini Dow. The chart is the differential of the contract notional values. (arithmetic difference) The contract specifications are given here https://www.cmegroup.com/trading/eq...-mini-nasdaq-100_contract_specifications.html https://www.cmegroup.com/trading/equity-index/us-index/e-mini-dow_contract_specifications.html Just as an aside, here is an area chart of the ES with VWAP from today's cash session. Here I overlayed the spread 20*/NQ-50*/ES in neon green. Because the Nasdaq components have such a large weighting within the S&P index, this spread is a great indicator for checking the relative strength of any move in the ES futures. Any significant divergence between the ES and the spread is likely to be short lived. The action in this spread can lead price action in the S&P futures! The NQ/ES spread can be thought of as a measure of the concentration of funds in the highest beta sector of the stock market. It looks like there was forced short covering at the end of the session...
I see, thanks. And just so I can share my current understanding and maybe you can correct me if im wrong. so the NQ notional value right now is 20 * 7831.75(current NQ price) = 156635 YM notional value is 5 * 26894(current YM price) = 134470 Then you mentioned this is long 2 NQ and short 3 YM NQ 2 * 156635(NQ notional value) = 313270 YM 3 * 134460(YM notional value) = 403410 To get the symbol entry field equation "40*/NQ-15*/YM" You must divide 313270(2 NQ notional value) / 7831.75(NQ price) = 40 403410(3 YM notional value) / 26894(YM price) = 15 And you do this so the chart reflects the notional value number and not the NQ/YM price number right? And as far as deciding the spread(in this case 2 NQ and 3 YM) you want the total notional value difference to be as little as possible?
No. Technically, you want to 'risk adjust' each position, so that they are balanced. A common industry measure of risk would be historical volatility (trailing volatility/rolling volatility/average volatility). So, you would 'dollar volatility adjust' the position sizing. This is called a 'hedge ratio' as well. There is the idea of balancing the positions to reduce the net volatility optimally. This is called 'optimal hedge ratio' AFAIK. So, here the dollar value of the volatility is larger for an NQ future than it is for a YM future. This is why you take less exposure in NQ than YM. It doesn't have to be perfect and you could even play with it a little. You can also combine mirco contracts to get a similar trade going. For example, you could buy 1 NQ and sell 1 YM and 5 MYM contracts. This would be the same trade but smaller risk. Yes. I don't really ever divide the contracts. The dollar value of the notional spread is what you should use to estimate the risk of trading an index spread. You can choose weightings that reduce your risk a lot. It's a very interesting way to trade, and the gains can be huge once you really start to learn how they are traded by the big money guys. I am experimenting with different ways to use them myself. These are really cool techniques for taking hedged positions and really flexible too. You can mix the style with other techniques of trading when you get comfortable with them. Also, the spreads give a lot of information about how the institutions are feeling about the market.
Hedge ratios for inter market spreads are NOT a static number - this holds true for 5’s versus 10’s and it’s true for ES versus NQ. As volatility changes over time and things like the components of an Index change - this will affect the hedge ratio. There are just a handful of exceptions that are quantity related to an industrial process - the Soybean Crush and the Crude Oil Crack come to mind.
I always wonder, do people trading these index spreads heavily, just market in/out on both legs, or actually use some kind of autospreader that actually gets a leg in on the bid/ask, then marketing the other? Any thoughts?
They are heavily spread traded, but not in the way you probably think. For example, a basket of equity stocks versus the futures index.
From what I have gathered, the spread itself IS the instrument. You are buying the spread ticker, not the individual legs. So there is no legging risk. You buy and sell the spread at a set price. Did I get that correct @bone? Exchange-traded spreads are their own symbols?