Trading the S&P/DJIA spread

Selling at 31-33

 

I haven't calculated exactly what the margin is for the spread with IB. I believe it is about $3500-$3700, which seems reasonable, but I'm sure there are more favorable terms among other futures firms if that is of primary importance in your trading.

 

Sell (adding to position) at 35-37

 

esc trader.Thanks for your posts. I have a ? . do you do the spread 1 for 1 i.e buy 1 e dow and sell 1 emini? Thanks

 

Thanks to all who have shown interest in this thread.

This is some of the methodology that I use in trading this spread.
I have seen it done by dividing one price by another and using that ratio (and other variations), and of course, there are other equally valid methods being used. I prefer to do it this way, just so that I use whole numbers and can calculate quickly in my head if necessary.

Multiply the S&P price by 9.5 and subtract the DJIA price (front month futures on both). This gives me a whole number price for the spread, for instance I may be "selling the spread" at 30 and buying it at 22. Each point is worth $5 per contract.

9.5 is roughly DJIA divided by S&P, and is used as the multiplier for that reason (and to get our "hypothetical mean", that is, the value the price should revert to - around 0). DJIA is roughly 10 times the value of S&P, and since the point value of S&P = $50 and DJIA $5 contract = $5, the ratio of contracts is 1:1 (S&P emini to DJIA $5 multiplier), so "selling the spread" refers to selling 1 S&P and buying 1 DJIA. The opposite for buying the spread.

 

Tnx for reply, esc_trader!

Answering my own question actually the best way to find out margin for various situations for IB clients to simulate a trade in demo mode, although prices there are fake, but margin calculation seems to be real.

What I found out, that overnight maintenance for ES/YM spread is about 4500 USD, which is less then just adding one margin to another (that would make a 4850) but still a way higher then it would be logical for this spread.

For example 2 contracts of NQ/ 1 contract ES spread will have about 2000 only. But this spread is significantly more volatile. The only explanation I found, that YM is other exchange product and therefore risk calculated much higher then for CME own products... But that's my assumption only.

 

Hi esc_trader,

Thank you for sharing this info with us. I have one question;

What is the historical limits of your spread?e.g has the spread ever been to 100 levels?(+/-)

Thanks

 

I don't know the historical correlation, beyond looking at the daily correlation roughly over the past year, just to get a general idea.

My opinion is that historical data provides poor indication of future results and may be even be detrimental when providing a false sense of security. (You get the idea here that I don't put much faith in standard deviations and historical patterns)

Of course, a trend in the spread price is the risk in this type of trading. I have observed that the spread usually is not subject to trend except during periods of overall market trending, and will take at least a few days to do so significantly. I try to keep my holding periods as short as possible (seconds to minutes is preferable), to get as many profitable trades as I can to compensate for the losses I will have to take when a trend in the spread sets in, which from my experience may happen over a period of a few days.

 

I have been following your method. This went pretty far against your position today, when do you call it quits?

 

Sorry, didn't post any trades today, I was tied up on other spreads - very hectic and busy day here. I likely would have traded in and out of the SPY/DIA today. There looked like some opportunity to get out of the current short positions around 40 early in the day, but I saw later that it was in the 60s, so I just left it alone today.

The risk going forward, in my opinion, is a string of up days. The frantic buying makes the spread more volatile.
If we see pullback in the mkts tomorrow we may see some reversion. I'll try to post trades in the SPY/DIA tomorrow. Personally, I'm going to hold these for the time being, but if we can get down to the low 40s near the open, I will likely close these out, and start trading the range we see tomorrow.