Swing Trading Futures Spreads

Discussion in 'Announcements' started by bone, Sep 20, 2017.

  1. bone

    bone ET Sponsor

    I'm a big proponent of swing trading exchange supported futures spreads for some very good reasons - they are the cheapest margin available, and in the case of intra market combinations (same product different expiries) generally speaking they tend to behave and model better than the flat price outright contracts. My second point about more docile behavior is especially relevant once you move out on the curve away from the prompt (front) three months - which are usually dominated by spec order flows.

    I wanted to talk about two "extremes" if you will - a Eurodollar intramarket exchange spread and an Unleaded Gasoline intramarket exchange spread.

    It's no secret that if you go to a Chicago, New York, London, Singapore, or Sydney proprietary futures trading firm, that the majority of the big traders are indeed spread traders. What surprises most folks is the number of huge prop traders involved in STIRS - especially the CME Eurodollars. Most traders would look at the Daily trading range of that market and yawn. Worse still, they look at the spread order books - there can quite literally be 11,000 best bid by 15,000 best offer. Boring. But what gives with the Daily Volume being over 3M and serious open interest extending well into year 2023 ?

    http://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_settlements_futures.html

    For this particular Condor, today's trading range was essentially 0.23 to 0.25 - at $25 a full tic this is a $50 trading range for today:

    [​IMG]

    I would guesstimate that the margin for that one lot Condor will be between $175 and $195:

    http://www.cmegroup.com/trading/int...ctor=INTEREST+RATES&exchange=CME&pageNumber=1

    The margin for the Dec 18 GE outright is $295 for comparison's sake.

    So why would so many big swinging dick prop traders and large independents trade Eurodollars ? From my experience, there are two reasons: 1. They can carry ALOT of them, and 2. They don't have to panic - it's not that kind of crazy cat lady schizoid market.

    And, intramarket spreads like Eurodollars tend to TREND very well:

    [​IMG]

    It is fair to say that it could possibly be easier on a person to make the same amount of money per month trading a Eurodollar GE spread on a swing trading basis as compared to, say, scalping or day trading outright Crude Oil futures. Obviously you'd have to carry much greater volume in GE but the volatility will certainly be far less than outright CL. It's a reasonable statement - depends upon the person's risk tolerance, commission schedule and what kind of trading style appeals to him. If you've been trying to make something work for a reasonable period of time and things aren't working out - a change in strategy might be called for.

    Here's the Unleaded Gasoline outright futures contract Daily:

    [​IMG]

    Over the same time frame, here's an Unleaded Gasoline exchange spread Mar-Apr-May 18 Butterfly:

    [​IMG]

    Let's say you bought 1780's in that spread and sold out at 1700 - at $4.20 per tic that's $320 on a one lot spread.

    It's a possibility worth seriously considering. Swing trading keeps you out of the domain of the algos and bots. And swing trading exchange spreads keeps the margin requirements QUITE affordable. There's also the matter of scalability - exchange spreads will almost always have much greater volume on the bid/ask as compared to the outright futures.

    The only downside I see to trading spreads would be high volume day trading - the commissions on a retail basis would make that scenario much less appealing.
     
    Last edited: Sep 20, 2017
    ryker, shatteredx and Sprout like this.
  2. that low margin trap also translates to low reward. i have never understood - well on second thought it lets you in the game jumping a low barrier.
     
  3. bone

    bone ET Sponsor

    Not sure what the "trap" is - good luck with the day trading fund btw.
     
  4. bone

    bone ET Sponsor

    Hint: go interview with a Firm Principal at DRW or Ronin or Jump etc. etc. in Chicago and ask them if futures Spread trading is a "low reward" proposition.
     
  5. truetype

    truetype

    "Spreads: twice the risk for half the profit" -- old Wall St saying :sneaky:
     
    MarkBrown likes this.
  6. bone

    bone ET Sponsor

    Such asinine nonsense explains the demise of "old Wall Street" - especially in the context of intra market Exchange futures spreads.
     
    Overnight likes this.
  7. bone

    bone ET Sponsor

    Here's a CBOT Five Year Treasury Note Future Daily price action from early August. You can see that the market rallied steadily, and then sold off rather sharply:

    [​IMG]

    Here is the synthetic ratio'ed Fives versus Tens spread. You can see that during the exact same time period this spread steadily sold off in a narrow daily price channel of only a few tics. The price action and volatility are unique from the flat price outright Five Year Note futures contract:

    [​IMG]
     
  8. bone

    bone ET Sponsor

  9. bone

    bone ET Sponsor

    Look at the settlement sheet for ICE Gas Oil futures. Look at the spread volume versus the total volume - by my count the implied spreads easily account for more than half the total volume. In several months - it's close to or even all the traded volume for the day !

    https://www.theice.com/marketdata/reports/10
     
  10. Overnight

    Overnight

    Hey there bone, got this notice today...

    New Daily Settlement Procedure for COMEX and NYMEX Metals Futures

    Effective Sunday, October 22 (trade date Monday, October 23), the daily settlement procedure for COMEX and NYMEX Metals futures will be harmonized to provide a standardized methodology and to improve transparency. The new standardized methodology will use:

    • A volume weighted average price for the derivation of the active expiration.
    • All other expirations will use volume weighted average calendar spread prices as the Tier 1 criterion for the derivation of settlements.
    • Any remaining expirations will use active and actionable calendar spread bids and offers as the Tier 2 criterion for the derivation of settlement prices.

    Does this change significantly impact the settlement price of metals like GC and HG? And would it change your approach to swing-spreading metals? I do not trade metals live yet, so have no baseline for comparison.
     
    #10     Sep 28, 2017
    bone likes this.