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Swing Trading Futures Spreads

  1. 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 ?


    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:


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


    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:


    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:


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


    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.
  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. Not sure what the "trap" is - good luck with the day trading fund btw.
  4. 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. "Spreads: twice the risk for half the profit" -- old Wall St saying :sneaky:
  6. Such asinine nonsense explains the demise of "old Wall Street" - especially in the context of intra market Exchange futures spreads.
  7. 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:


    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:

  8. 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 !

  9. 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. 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. Hey, don't you read JackRab? There is no riskfree trade according to him.
  12. Looks like they're doing the same thing with some energies...
  13. *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. 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. 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. 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. 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. 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. 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.
  20. Here is the link to a recorded CME Webinar on the Eurodollar versus Fed Funds exchange traded futures spread. As far as esoteric interest rate topics go this wasn’t terribly long or boring.

    This is essentially a proxy for unsecured commercial debt (GE) versus unsecured bank debt (FF). This spread is heavily traded in the cash market because there is a better edge in the bid-ask. For my purposes the futures provides far greater capital margin efficiencies.

  21. Here is a Eurodollar Condor that I shorted late in September and got taken out of it last week. Not sexy, quite pedestrian and very low margin ( maybe $100 for a 1x1x1x1 ). To take several full tics out of a really timid low vol position works just fine. Somewhat unusual for me in that I never really had a drawdown on this particular longish term swing trade. This is about as low vol as it gets for me.

  22. CME (and a few FCM’s) has a downloadable SPAN margin calculator for inter and intra market futures spreads.
  23. PC-SPAN? That thing gives me a headache. Less painful to calculate it in the head.
  24. Hey bone, what do you think of the NOB spread going into 2018. Long notes. Short bonds. That section of the curve steepened nicely late last week. More room to run in 2018 given relatively low rates ? Unlike many on this site it seems to me that you actually may actively trade!!!
  25. I was personally short ZN versus ZB but reached my target second week in November. Personally, I think they have four 2018 rate hikes already baked into the cake, and I am sitting on my hands as far as the US long term Treasuries are concerned and only have on a few STIR spreads at the moment.

    CME Treasury ICS Ratios here: http://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html


  26. I have noticed over the years that some traders are strongly predisposed to a personality trait that has them consistently fading any market. They want to fight the market.

    In the 1990's there was a very big, quite prominent 30 Year Treasury Bond independent local futures trader by the name of Chip Kenyon. He gave a brief seminar talk at a CBOT event in Chicago, and I made sure to attend. He told the story of himself building up his account to the point where he was ready to stop leasing his Full Membership and buy it outright. It was a big goal and milestone in his career. In essence, he went on to explain how he gave back his year to date (and the seat purchase amount) in basically one horrific day "cannonballing" the market. [cannonball is an idiosyncratic term for fading everything for size. Just because.] He went on to call the behavior a "disease", and vowed to never do that again. He was just going to stop fighting the market. In several weeks time since that vow, he had quite impressively recovered his account from that disastrous day. He went on to buy that Full Seat, and he concluded that since that quite painful lesson his trading really took off to the next level. He was still at the time of his speech very bitter about 'the complete waste' that horrific day was. At the time of that speech, he was known around the pit as a trader who would take a 2500 lot. If there was a floor broker looking to move serious size and assure a fill for his client with the least drama then Chip Kenyon had the reputation of being one of the few locals that a floor broker could count on. And there were only a few locals like that around.
  27. I'm the ultimate fader. The key is knowing when to step away.
  28. hi Bone:

    When you enter your ZN/ZB trade are you trading 3 ZN's for every ZB. Would other ratios still look trendy (like 2 ZN per 1 ZB)?

    Another question. I trade GE spreads in my account. Given that Libor is slated to be retired in 3 years, do you think there will be another exchange traded contract to replace GE?
  29. R, speaking for myself I try to use the most current published CBOT ICS Ratios ( CME website link in a post above ). Unlike Eurodollars, keep in mind that these are fungible, physically delivered products, and that the Cheapest-to-Deliver (CTD) instrument can change from roll to roll ( this is especially true for the shorter duration products ). For the majority of circumstances, the NoB usually trades in the more familiar 1.6:1 ratio. But since the current listed CTD for Ten Year Notes has a bit less duration, hence the 3:1 ratio.

    It’s important to keep in mind that both the outright ZN future and the exchange supported inter market NoB volume are based upon the CTD, because that’s the issue that most of the Basis Traders will be using ( cash Notes vs Futures Spread traders ). Basis traders do huge size, and they account for a substantial share of the OI.

    When my clients are starting out to trade live, and they are modestly funded, I will suggest to them that they round up or down on inter market hedge ratios. For example, with the 1.6:1 NoB I would suggest that they trade it at 2:1. While not exactly correct, it is still less risk and margin than a 3:2 and the exchange will still assign a very favorable SPAN margin credit.

    Hope this helps ?

    In terms of Eurodollars and Libor products disappearing, IMO there would have to be some sort of replacement and I’m sure the exchanges are sorting this out at present. I say this because the need for an exchange cleared tradeable proxy for both Bank Credit Lending and Commercial Credit Lending would be so prominent and so desirable. The OI and Daily Volumes on Eurodollars make it the CME’s biggest product. Not everyone has access to the swaps market. And even those bank desks making markets in the swaps hedge with Eurodollars.