Spread trading with futures sure looks appealing with the low margin. With spreads you can be close to market neutral & make large profits when relative strength changes. This is a hypothetical spread trade long +3 RTY & short -2 NQ.
Quick calc on that shows that for holding those positions, you'd need only $19.2K for the performance bond. Not bad considering what you are holding.
You really want to swing trade spreads. And with the generous margin credits provided by all the futures exchanges for spreads you want to take advantage of that. They're cheap to hold overnight. The only problem I've seen is that most discount futures brokers don't have their risk management systems set up to margin you correctly intraday. But the FCM's who clear prop firms and hedge funds (Advantage, RCG, RJO, Dorman) will know exactly what to do because spread trading is core to their business clientele. The really highly capitalized prop firms like DRW and Jump and the Quant Hedge Funds are the ones with the infrastructure and ECN's to arbitrage them. Intraday arbitrage is expensive and crazy competitive.
anybody use these OI heat maps? https://www.cmegroup.com/tools-information/quikstrike/open-interest-heatmap-agricultural.html
If I were playing spreads, I'd go 2:1 RTY:NQ. As it is, I sold my NQ and exchanged the proceeds for RTY at that ratio. It looks like the rotation to value is happening (still a smidge early to declare). If rates rise, then RTY should outpace. Rates to 1.5, and then close to 3. That'll give some tail wind to small caps, time will tell if we get there.
i have what i think is a very extensive well thought out spread system and yet i don't trade it. because when it gets down to it - it's more difficult and perilous than trading just one market alone. mistakes, fill's, slippage, partial fills, catastrophic events and much more all have greater impact on spread, arb, pair trading. it's an idea that was spawned in the era of buying options gets you rich with limited risk. it's an idea that is almost as dead and flat as the profit curve of one big money manager that i know who uses arb. the reason for using it would be if you have big money to manage and you are participating in commissions, in that case it's a way to generate income while basically parking the clients money in the market. however if you are serious about spread trading no one did it better than goldberg.
I tend to shy away from generalities when it comes to trading, as everyone is different and everyone's trading system and style is different. If someone has a trading system that is consistent over a protracted period of time and it works for them, I would be the last person to tell them to change it. I traded ES versus NQ this past Spring and early Summer of 2020. It was the first stock index spread trade I took in about 18 months - it has to be a really compelling setup for me. I would estimate that over 90 percent of the trades that we are doing are intra market exchange supported. So that is the same product, different expiries. So there is a singular order book price ladder and the spread leg components are internally matched and filled by the exchange. CME, ICE, Eurex - all the regulated electronic exchanges do this. We also stay away from the prompt months, so we are active in the forward curve. So the slippage and partial fill mistakes are a non-issue for exchange supported spreads. Having my clients stay away from the prompt months for intra markets tends to minimize the catastrophic physical distortions like what we saw in May '20 Crude and June '11 Cotton. I completely agree with you about the dangers of electronic arbitrage. We are trying to take large chunks of a trading range out of these, so we are hanging on to them as the modeled trading range for a specific spread combination dictates. These are really cheap to margin overnight so we are modeling them thoroughly and we are holding these (swing trading) and not arbing them. Let me give you a couple of examples of trade holding timeframes: Unleaded Gasoline Butterfly: 90 days, + $1,264.20 on a 1-2-1. Eurodollar Condor: 63 days, + $1,181.25 on a 1-1-1-1 It would not be unusual for me to hold a Eurodollar Spread for 4 to 6 months - most of them have only a 2-1/2 - 4 tic daily trading range. On the other hand, a Gasoline Crack is usually held for days. That thing can really move in the late Spring and Summer. The holding timeframes are dictated by the targets we set on the modeled trading ranges. Generally speaking, the majority of our inter market spreads (being the minority) are in the interest rates and energy and they are highly correlated. Examples would be CBOT Fives versus Tens, Eurex Schatz versus Bobl or Unleaded Gasoline versus Crude Oil - that type of thing. I have some European clients who will spread Dow Jones Euro Stoxx versus FTSE - stuff like that; but even for them it is the exception rather than the rule. YMMV, and I wish everyone good fortune! Just my own opinion, but I have quite a bit of personal account, Commercial, and hedge fund experience trading futures spreads and OTC Swaps spreads. I've also worked with a couple hundred clients through the years.
Bone you mentioned "intra market exchange supported. So that is the same product, different expiries. " so Exchange listed calendar spreads but for same index futures ..does it work at all? ES March-Sep? any point? are they not used just to roll the expiry Or you are referring to spreads which has seasonality !
You're talking about some really different subject matters there. For an index spread like ES or YM or NQ, the first to second month expiry (currently March 21 to June 21) is an incredibly narrow trading range and it's valuation is dictated by the convenience yield (finance) and the open interest roll. With commodity and financial futures, seasonality is just one factor. The bigger factors are Commercial supply versus demand dynamics and structural changes in the forward curve.
-with the Calendar in your first chart with the narrow range what chance a retail trader has of getting filled at the upper /lower values and make some crumbs - with longer dated calendar on Index does the chances improve at all?