Metals Spreads

Discussion in 'Commodity Futures' started by bone, May 2, 2010.

  1. bone

    bone ET Sponsor

    I have some clients who are really lighting up the intra-market metals spreads on Comex and LME. Platinum-Gold, Aluminum-Copper, Zinc-Lead. Just killing it.
  2. What do you mean? Could you please elaborate your points?
  3. bone

    bone ET Sponsor

    Comex vs. Comex, Comex vs. LME, LME vs. LME metals spreads with very good statistical correlations and very good industrial fundamental relationships.

    LME or Comex Gold vs. Platinum

    LME High Grade Aluminum 3-month vs. LME 3-month Copper or Comex Copper

    LME 3-month Zinc vs. LME 3-month Lead

    These guys are basically using my technical models, risk/reward targets, and spread ratios and just killing it. Maiming it. One of my clients claims he is now 5% of the Comex daily volumes. Three clients in particular - making their year in a matter of weeks. Hooray for one more year of blended capital gains tax treatment.
  4. Wow, you're so generous to share a holy grail like this. If only other vendors were such givers.
  5. bone

    bone ET Sponsor


    Judging by a quick scan of your posts - you appear to be quite long on sarcasm and devoid of any meaningful content regarding trading. Aside from high frequency cynicism, do you care to add something regarding metals spreads?
  6. Is there any way to proxy these spreads in the equity market? I'm assuming you're talking about calendar spreads.
  7. bone

    bone ET Sponsor

    These are not calendar spreads - they are futures contracts versus futures contracts. You get about 80% SPAN margin offset, and nearly all of my clients are in and out of them the same day. Quite frankly, I've got clients trading these quite effectively using IB or Advantage Futures non-member rates.

    You could certainly trade ETFs - for example, buy a gold ETF and sell a silver ETF. My concern would be cointegration issues with the broader stock market, and fungibility variables between the physical and the ETF specs - it could very well make the ETFs harder to model and quantify risk/reward skews versus the futures. Great question - let me give that a look and report back to you about it.

    I have some clients trading cash forex spreads instead of the futures - it works better than the futures in terms of 'tail risk' issues.
  8. Why are high frequency participants not beating you to the punch if it's such a sure thing? I don't suppose you could post a chart of such contracts (or links.) These may seem like stupid questions, but I've never gotten involved with futures. What's the risk exactly? I'm assuming you have gold for delivery in some month on CME and similar on LME. Then you buy one locally, sell the other one on the other side, and there's some variation. What's going into the price difference between the two contracts?
  9. bone

    bone ET Sponsor

    There is no 'sure thing' - just better risk/reward skews.

    With properly modeled spreads, you are trading the differential (price differences) between two or more instruments. You hedge out directional risk and the profit/loss comes from divergence or convergence of the spread differential value. It could be cash, futures, stocks, currencies, almost anything. That is relative value, and it's the way many bank desks and hedge funds trade. The vast majority of successful electronic traders I know of here in Chicago are spread traders. For every mad Russian buying 1000 ES futures, there are ten guys who are buying 500 CBOT Two Year Note futures and selling 480 CME Dec 11 Eurodollar futures as a spread. Most spread traders are actually flat at the end of the day.

    Stat Arb 'black box' automated trading systems trade markets with very high mean reversion - for example, a basket of closely correlated components with equal long and short components (for example: short V, long X, short Y, long Z) with very, very low volatility; they are literally picking up pennies. By design and methodology, myself and my clients model and trade spreads for statistical characteristics that do not lend themselves particularly well to high frequency automated trading on convergence.
  10. bone

    bone ET Sponsor


    I do model an ETF spread that behaves like the weighted Platinum vs. Gold futures spread:

    PPLT vs ( GLD * 1.5 )

    Both are NYSEarca, and be sure to lead your execution with PPLT as it only trades about 40K per day. I don't like the gold vs. silver spread for a number of technical and fundamental reasons, and the other ETFs have substantial fungibility differences that introduces substantial 'tail risk' - and nobody needs that.
    #10     May 3, 2010