Swing Trading Futures Spreads

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

  1. bone

    bone ET Sponsor

    Here's a Feeder Cattle Calendar Spread that I shorted just after the open on Sept 20, and literally came within a single tic of getting stopped out on - getting near to my profit target now. I use modeled volatility and trading range to set stop-loss and profit targets.

    #11     Oct 3, 2017
  2. Pekelo


    Hey, don't you read JackRab? There is no riskfree trade according to him.
    #12     Oct 4, 2017
  3. Overnight


    Looks like they're doing the same thing with some energies...
    #13     Oct 4, 2017
    bone likes this.
  4. bone

    bone ET Sponsor

    *Just as a PSA* - the commonly cited “ risk free rate of return “ for the purpose of calculating metrics like the Sharpe Ratio is the US Ten Year Note yield. * PSA concluded. *
    #14     Oct 4, 2017
  5. bone

    bone ET Sponsor

    If you have on a fairly illiquid Spread, which you can from time-to-time, this procedure should smooth out closing marks and make them more fairly valuated.

    As a side note, I typically won’t trade a Spread that has less than 3K open interest. For many of these less traded spreads, there will indeed be a consistently quoted bid/ask Spread but it may only actually trade a few to several times per day. Traded Volume steadily picks up as the expiry months quoted in that Spread get to within, in many cases, two years of the prompt month.
    #15     Oct 4, 2017
  6. maxinger


    Let me see if I got your intended message correct.

    It is possible to profit from trading ZF outright perhaps by day trading or scalping.

    IT is also possible to profit from trading spread (ZF - ZN) through swing trading.
    Price movement will probably be gentle.
    Margin needed will be smaller. So generally traders trade in greater volume.

    Hope I am correct.
    #16     Oct 5, 2017
  7. bone

    bone ET Sponsor

    Generally speaking, your points are fair. There are plenty of proprietary futures traders in Chicago, NYC, London, Sydney, Singapore who day trade inter and intra market spreads (for stupid size typically), but they have the significant advantage of Member Clearing rates and just a few cents in brokerage (GCM) commissions. At retail clearing rates day trading spreads other than the more volatile ones would not make much sense. But swing trading futures spreads on retail clearing/commission rates makes plenty of sense. For me personally, my trade holding time frame is entirely dependent upon a particular spread's volatility. I could hold a Eurodollar Butterfly for six months, and an ICE GasOil/Brent Crack for two days.

    Keep in mind that there are literally thousands of regulated electronic exchange recognized potential spread combinations. It can be a very appealing proposition for the type of person who might not necessarily want to follow the herd. Spread strategies can have quite a bit of dimensionality to them, and typically appeal to creative thinkers.

    Yes, the price movement and volatility - particularly for exchange supported intra market spreads, will be much better behaved than the analog outright prompt futures month contract. This is especially true for intra market spreads if you stay away from the first three months in the curve where spec order flows dominate the volume.

    So yes, depending upon the individual it might make sense to consider the possibility of levering a more tamed price action versus the idea of trading smaller size with outright futures contracts in a much more volatile and choppy price action scenario.

    If you can manage to query some proprietary firm futures traders in Chicago, NYC, London, Sydney, Singapore I think you'll find that the majority of the big earners are indeed employing some type of spread trade strategy. Nearly all of them will carry a core position overnight and massively day trade around it during peak market hours.
    #17     Oct 6, 2017
    maxinger likes this.
  8. bone

    bone ET Sponsor

    What the trader is trying to model and ultimately capture in a proper spread trade is either the convergence or divergence between at least two highly correlated products (both statistically and fundamentally correlated). Inter market spreads are highly correlated positions using different instruments - like Crude Oil versus Gasoline or Soybeans versus Soy Meal. Intra market spreads utilize the same product but different expiries - like a 1-2-1 Eurodollar butterfly using Dec17, Jun18, Dec18.

    Spread trading is the basis for most all arbitrage. Physical Gold vs Comex GC. Cash Treasury Bonds vs CBOT futures. OTC 2 year Plain Vanilla Swaps versus Dec '19 Eurodollars. Exelon electrical generation versus PJM-W ICE swaps. Memphis Cash Cotton versus ICE Cotton futures. That kind of thing.

    The basis for almost all Statistical Arbitrage is the high speed capture of spread differentials utilizing automation and ridiculously expensive ECN networks.

    The spread differential narrows or widens. The point is to model that differential in the abstract and make a projection about it's future behavior. Some experienced spread traders might opine that this differential behaves in a smoother and more reliable fashion than the directional movements of a singular outright product. Another feature of spread trades is that they are usually, but not always, fairly well insulated from the turbulence of broader market moves.
    #18     Oct 6, 2017
  9. bone

    bone ET Sponsor

    Price improvement in terms of fills can be a double-edged sword. For higher volatility products like RBOB, HO, CT I will almost assuredly be hitting a bid or lifting an offer. For lower volatility products like GE that I want to sell, for example, I will work an offer but if the bid starts trading out I will go ahead and hit the balance.

    I've seen a couple clients get allured with price improvement - only to completely miss a fill and tragically fail to participate in an opportunity that in hindsight would have more than equaled quite a few "price improvement" fills.

    Obviously this is much more relevant to swing trading, where we are targeting fairly substantial chunks of modeled historical trading range.
    #19     Nov 2, 2017
  10. bone

    bone ET Sponsor

    A quick word about what the heck an exchange registered electronic futures proprietary trading firm is.

    An electronic proprietary futures trading firm registered with CME and ICE is a completely different animal than the equity prop firms so commonly advertised and talked about here on ET and elsewhere.

    Apples and oranges.

    By regulation the prop futures group cannot use the trader's (employee) capital. It must be the firm's capital at risk. In fact, the CME stipulates to these firms that the trader be paid as an employee on IRS Form W-2. I mean, many of them offer employee health insurance. Vacation time is up to you for the most part. I've seen guys take off for several weeks at a time.

    In my mind, there are three legitimate reasons to go down this path:

    1. To trade stupidly large size. Which they encourage. I've seen prodigies that in a year's time went from trading 5 lots to trading thousand lots. Literally. And in a few years time they took everything. And since you're splitting the profits with the firm and you're paying normal untreated tax rates on regular income (no blended capital gains) you really should be trading stupidly large size.

    2. To trade products and spaces that you as an independent almost certainly couldn't. I can tell you from personal experience that when I traded exchange cleared power and natural gas swaps (Clearport and LCH) at one of the firms I mentioned in other posts I had $12.5M of daily margin to play with.

    3. If you're a quantitative trader and go to Jump for example you're going to get an ECN infrastructure that is freaking otherworldly. And there is also programming and hardware/software support aplenty.

    Also, I personally don't know of any futures prop firms that "teach" newbies how to trade. DRW used to have a college internship program.

    Nearly all of the proprietary futures trading firms that I'm familiar with are run by principals who for the most part are somewhat legendary in their trading prowess. The equity prop business model I understand to be vastly different though - I have no experiences in that regard.
    Last edited: Nov 16, 2017
    #20     Nov 16, 2017