Bund Bobl Schatz Fly

[novish]

Hi there,

Is there anyone kind enough that would be willing to spend a few minutes explaining the basics for me regarding the bund-bobl-schatz butterfly? Ive just started trading and so far its been going ok. My initial overall feeling regarding the fly is that it is very hard to estimate where its gonna go next and what drives it either up or down. Im basically waiting for it to go 10-15 ticks one way and then get in and "hope for the best"/that it will come back to where it was so I can make a few ticks on its return.
My initial questions are if there is anyone out there with experience of the fly that in fairly simple language could explain what I should be looking or watch out for, that indicates where the fly will go. Simply put, what makes it go up and what makes it go down?

Thanks a lot!

/Novish

 

[amnonco]

Hi there,

Is there anyone kind enough that would be willing to spend a few minutes explaining the basics for me regarding the bund-bobl-schatz butterfly? Ive just started trading and so far its been going ok. My initial overall feeling regarding the fly is that it is very hard to estimate where its gonna go next and what drives it either up or down. Im basically waiting for it to go 10-15 ticks one way and then get in and "hope for the best"/that it will come back to where it was so I can make a few ticks on its return.
My initial questions are if there is anyone out there with experience of the fly that in fairly simple language could explain what I should be looking or watch out for, that indicates where the fly will go. Simply put, what makes it go up and what makes it go down?

Thanks a lot!

/Novish

basically you're trading the entire range of bond yields (in terms of time to maturity),
first, understand the basic technicalities, when yields go down accross the board, the spreads/fly will be cheaper (because there's a theoretical minimum to the yield, all ranges converge. when yields go up, the spreads/fly opens up.

now, ask yourself why would yields should/would go down/up?
inflation? ECB interest rate decisions? whole lot of other macro economic data bits?
again, basically, when inflation rises, that usually means interest rate hikes and therefore the fly should open. and vice versa.

that was a little about the fundamentals.
personally, I don't trade like that.
what you're doing is gambling, no matter what you do - you gotta have a system.
you've got to test it, and only then trade it.
you have to have proper money management.

remember, you're a trader, not an analyst. you're in it for the cash. you have to do what you have to do.

Good Luck

 

[novish]

Thanks a lot for this!
I totally agree with your statement, that Im "gambling". Youre a hundered percent correct, and in order to be able to change that I need some fundamental knowledge in place in order to be able to build a system/strategy to use and follow when I trade.
Your input is of much value and Im very greatful for your time.
Quick follow up question, when your refer to the fly "opening up" you mean goes down right?

 

[arabianights]

Incidentally why are you trading the fly? Are you being made to as part of some course?

 

[amnonco]

Thanks a lot for this!
Quick follow up question, when your refer to the fly "opening up" you mean goes down right?

opening up means that the longer terms (bobl too but moreso the bund) prices goes down (yield go up) and the curve steepens. the price of the fly tends to be higher.

 

[novish]

Thank you very much for explaining this to me! Very helpful. and yes, I am trading the fly as part of a course.

 

[amit.s]

I know a few guys who are trading the fly now who say it is providing more opportunities so good luck novish.

 

[novish]

Agree, the fly has been pretty stabile lately with a solid and fairly predictable 20 tick/day range. So all good and no complaints!

 

[amit.s]

Is there a comparable tradable fly for US bonds? imo looks more erratic.

 

[Martinghoul]

Of course there is... TU/FV/TY, aka ZT/ZF/ZN

 

[gooseman]

Is there a comparable tradable fly for US bonds? imo looks more erratic.

no, us 2 5 and 10 paper doesn't exist

 

[amnonco]

no, us 2 5 and 10 paper doesn't exist

ahhh....yes they do exist...
as martingoul stated...

there isn't a tradable readymade fly, but you can construct with (to buy 1 fly) buying 1 contract of TU (2 years) selling 2 contracts of FV (5 years) and buying 1 contract of TY (10 years)....it's exactly the same as bund bobl schatz - just for the US

 

[arabianights]

whoosh...

 

[Aston1st]

The fly has been trendnig downward since Non-Farm Payroll last month. Any ideas ?

Back in September it sort of peaked at 208.10 something, now it's trading at 207.28 or something!

 

[amnonco]

The fly has been trendnig downward since Non-Farm Payroll last month. Any ideas ?

Back in September it sort of peaked at 208.10 something, now it's trading at 207.28 or something!

short it?

seriously - have a plan...

 

[novish]

I have a few more questions about the fly that I would like to ask anyone who thinks they know the answers. I think the easiest way is for me to write down what I think and then you can correct me where and if Im wrong, you disagree or have another way of looking at it.

1. The Fly tends to move up one “positive” news (Rate cuts for example)
2. It moves down on “negative” news (Rate increase)
3. If the stock market goes up the fly goes down
4. The bund follows the US 10 year, but in the fly the Bobl seems to be the driving paper
indicating where the outrights are going.

The fly has been a good trade lately, pretty stabile and predictable. Bur it moves very slow and over the last 2 months or so no more than 15-20 ticks a day.
When I go through charts of how the fly has moved in the last year or two I can see that a year ago a 40-60 tick range wasn’t that unusual. Is this because the overall markets have stabilized compared to the volatility we saw last year?

Thanks to those of you willing to spend some time explaining and correcting.
/Novish

 

[amnonco]

I have a few more questions about the fly that I would like to ask anyone who thinks they know the answers. I think the easiest way is for me to write down what I think and then you can correct me where and if Im wrong, you disagree or have another way of looking at it.

1. The Fly tends to move up one “positive” news (Rate cuts for example)
2. It moves down on “negative” news (Rate increase)
3. If the stock market goes up the fly goes down
4. The bund follows the US 10 year, but in the fly the Bobl seems to be the driving paper
indicating where the outrights are going.

The fly has been a good trade lately, pretty stabile and predictable. Bur it moves very slow and over the last 2 months or so no more than 15-20 ticks a day.
When I go through charts of how the fly has moved in the last year or two I can see that a year ago a 40-60 tick range wasn’t that unusual. Is this because the overall markets have stabilized compared to the volatility we saw last year?

Thanks to those of you willing to spend some time explaining and correcting.
/Novish

1+2. positive and negative are quite relative terms. fly moves up on potential (and actual) rate cuts and moves down on potential (and actual) rate hikes. by potential I mean expectations derived of macro economic data (what you call - "news")
3. any correlation that is not with other debt (which is quite trivial) is temporary. sometimes the correlation is with crude oil, sometimes with stocks. the reason behind the movement is what matters. here's 2 examples: (a) there was a recession and interest rates are very low. positive cpi figures indicates that there's positive movement in economic environment and that moves stocks higher and indicates rate hikes and thus the fly lower (like you mentioned). however, think about a time where there's sustained growth (like 2 years ago) when the cpi figures came out positive - this still means rate hikes and the fyl went down, however this time it's bad for the stock market (high alternative investment option - flight to quality).
4. it is believed that european macro economic cycles lags the US one. while there's a connection between the 2 great economies, this can change (the bund follows10 year). I don't trade the fly that much, so I can't tell you about the bobl being the driving paper, however it makes sense. long fly consists of 2 short bobl contracts (more than the others) so...

and on a trading note:
"The fly has been a good trade lately, pretty stabile and predictable"

don't try to predict the market, it's useless, as you can learn from the examples above - things can change quite drastically quite fast. you need to have a plan, because sooner or later, things will change, and you predicitions won't work. what would you do then to not lose your money?
think about it.

 

[novish]

Thanks Amnonco for a very interesting and well explained answer to my questions!
I do admit that the word "predictable" in regards to the market is not the way to trade this in the long run. Youre very correct on that!
What I meant here was simply that being offside on a position today looks much "safer" than what I can see from how the fly has moved in the past. Basically, averaging in today when youre offside seems to me to be better to do when the range looks like it does today than a few months back when the fly could really take off in a non-stop, one way line up or down. And of course, this can all change by Monday morning and the fly moves in the exact opposite way it has done latley.

But I totally agree, trying to predict the market is probably the dumbest thing to do, especially at my level of experience. Im simply just trying to figure out the fundamentals which I think are crucial if you want to make this work in the long run. It would be pretty naive of me to think I can just log on and "make money" trading the fly without proper knowledge or any kind, or experience from it.
So that is what Im trying to do now, learn and observe, go through old charts and study its behaviour and link larger moves or curve changes to to specific data/events/economic data releases in order to find a pattern and clearification to why "what happens when". Im fully aware of the fact that you need a plan/strategy in order to trade these markets successfully, but as in everything else I rather have no plan and move on slowly until I know how to set up a specific plan than following a plan based on the wrong assumptions. Basically, a strategy you dont fully beleive in is pretty worthless the way I see it. So until I feel more "secure" and up to date with things I will continue to do this on a lower scale and pile up knowledge and facts about how it all works. And when I feel that I know a little more about why things are happening and moving the way they are and I notice that Im making progress because of it I´ll increase and add more aggressivness to my trades. I dont think there are any shortcuts in trading. To make money in the long run you have to know what youre doing, and why youre doing it. For this you need knowledge and experience which only time can give me.

Once again, thanks a lot for your tips and ideas! I really appreciate you taking the time to explain things and I am very greatful!

/Novish

 

[Aston1st]

short it?

seriously - have a plan...

For a medium term trade, 1 - 3 Days even longer that's a viable trade, generally I am looking to Day Trade.

@Novish,

The 15 - 20 tick moves are there but I have found that on a day trade it generally tends to trend within a 5-6 tick range before breaking out of a set range, you can usually see this clearly on the 5 min chart.

I have seen the fly trend in the direction of the Dax at times, although the outrights have down the oppersite.

 

[novish]

agree, a typichal day lately is some movement in the first morning hours and then pretty much what you said (5-6 ticks) until late afternoon when it catch some speed and breaks out. normally around 10-12 or so ticks.

@Aston1st. "Still I too await some heavy weight answers to your intelligent questions."
Are my questions that stupid that I made you laugh or are you actually looking for the same answers?
I hope Im not making a complete fool of myself here haha