trading spreads vs. outrights?

Discussion in 'Commodity Futures' started by mizhael, Oct 13, 2010.

  1. Lets say you want to buy 100 CL Dec10, and buy 150 CL Jan11,
    There are two possible routes:

    1) buy 100 CL Dec10, and buy 150 CL Jan11, as outrights;

    2) buy 100 CL {Dec10-Jan11} spreads, and then buy 250 CL Jan 11 outrights;

    3) buy 250 CL Dec10 outrights, and then sell 150 CL {Dec10-Jan11} spreads.

    when do you prefer 2) and 3)?

    any thoughts? Thanks
  2. TraDaToR


    It is pretty much the same thing as implied prices on each of the 3 legs are products of the 2 others. You can try to leg in passively with the calendar spreads as it moves slower, but you will pay a lot more commissions. I would go with the 2 outrights, but 3) is not bad if you get filled on calendar first.

    NB: you can use real life size like 3-5-10 lots, it's the same.
  3. I would suggest just doing the outrights. The only time I'd do spreads is if the outright months you are trading don't have good liquidity and then spreads will help you get the volume off at a respectable level.

    Otherwise by the time you add the commissions on and the potential loss on the spread levels vs the outright scratch, it would work out worse?
  4. bone

    bone ET Sponsor

    No, you would want to execute the exchange spreads instead of trying to leg the spreads via automation or manually. In the electronic energy markets you will getted flipped and arbed out of it. If you don't believe me, try it with small size. The other issue that comes into play is the SPAN spread margin intial performance bond. You'll get the 85% credit on the spread position but if you are manually legging it, the orders will be treated as outright risk. In other words, for you to be able to even ENTER an order for 150 CL cars outright, you'll have to have about $1M buying power for the broker to allow that order and comply with exchange regulations.
  5. Hi Bone, If your reply was in reference to mine - I had better clarify what I meant....

    I was never saying use automated spreaders, by spreads I mean exchange traded spreads.

    By 'spread levels' I was talking about the individual levels given by the exchange on the spreads. For example.... He might buy the Dec at one price on the outrights, and then Dec selling from the spread could end up being at a worse level, resulting in a closed out loss. Though I guess you could argue that that loss would be negated by an improved fill on the Jan side of things.....
  6. i.e. the liklihood of him being able to sell the excess Dec and therefore scratch is not high. (refering to example 3).

    Though I do see your point on the SPAN offsets - it's a good one. I work for a broker dealers servicing institutional clients, so I overlooked the buying power issues for 100 lots.
  7. TraDaToR


    He is talking about being long both expiries, not spreading.
  8. I realise that....

    But he's going long 150 Dec too many, to enable him to get long the 150 Jan, by shorting the Dec Jan Spread.
  9. TraDaToR


    Yes yes Papa, I was telling that to Bone.
  10. Phew :)

    This is an interesting discussion guys. I'd like to know what people think, and what way they'd go about doing it and any other factors that might have been overlooked so far...
    #10     Oct 14, 2010