Eurodollar Madness

[BBB]

Thought I'd post these charts showing the current H6-M5 spread that I was tempted to take - but abstained. (Also in an attempt to bring some karma back home as I hope to bring back some discussion to T2W on what I think are real trading issues, rather than needless discussions on spread betting for 1p a point)

A lot of people are jumping on the 'I dont use indicators' band waggon at the moment for no other reason than it seems the current fashion to think in this way.

I wanted to show that indicators do have their uses if we know how to use them properly. Admitidly, the majority of my positional or day trading is relatively indicator free.

So here we have 2 charts. One weekly and the other daily. As the spread chart gives us so little to go on - just the line - not even bars or volume, I find indicators can be used to give a little more clarity to what is going on. Both charts look strong when just looking at the line and I was tempted to open a position until further examination....

The RSI is useful when comparing 2 related charts as it is a true oscillator that is bound between 0-100. Therefore if A has a reading of 55, while B has a reading of 67, B is obviously the stronger candidate. Obviously there must be some sort of relationship between A & B (like 2 stocks in the same sector, or in this case 2 calendar spreads of the same instrument for any comparison to be valid). However, this wasnt necessarily the reason for posting these charts.

As I said, they both look strong when viewed as just line charts, yet both the weekly and daily charts are showing divergence with their RSI. RSI can be misleading. any oscillator can diverge for a long period before the trend finally finishes. However, when used with Bollinger Bands, more meaning can be determined. In this case, the weekly chart shows a high in November just outside the bands, followed by 2 higher highs inside the bands. So there is confirmation from a volatility indicator and a momentum indicator of potential weakness emerging. I have found this to be a very reliable indication of the end of a trend before. The same situation can also be seen in the daily chart - more confirmation.

So I have left this spread alone and search continues further on down the curve for something a bit stronger. Z6-Z5 may be better..... Learning how to reject trades is as important (if not more so) than learning how to find trades. Patience is the key in trading.

Of course, having posted this, the spread is undoubtedly going to go through the roof - such is life! I should point out though that my objective for a spread trade is to ride the trend for weeks if not months. I am not interested is a quick few ticks. I want 20-30 ticks. When you take into account the incredibly low margin for these positions (about $439 per spread I think), large positions can be built up over time. Good things come to those who wait - and take the trouble to do some work and look beyond the envelope.

 

[Beach Runner]

BBB,

This has been one of my favourite threads that I always look for updates on; unfortunately, in my ignorance I have nothing to contribute to it, but I just want to say how I appreciate reading the posts on it. People keep writing how little information there is on spreads (and not just Eurodollars) and it is true (one or two threads here and on Elite) - so it's good to read yours and others contributions. Thanks.

 

[BBB]

No worries - glad you like it.

You're right - spreads aren't that widly known about - and the reason why not much is written about them is probably because there isn't that much to say about them. Bgold, FTSEBeater are also spread traders I believe. Some of the spreads on commodities can be VERY profitable - more so than ED. I just like ED because its simple, electronic, and the trends are so persistent.

The downside with spreads however is that it can be a bit hit and miss. You cant put a stop in the market (if thats your thang), and I've closed other wise excellent trades intra-day because the spread went against me during the day, only to carry on in my direction on the close. This is mostly due to the intra-day manipulation that goes on in most markets that gives a false impression of whats happening. As the close approaches, traders settle up to a position where they are happy to carry(or not) overnight - reflecting the perceived value if you like (the close is the most important price of the day is what Im trying to say here).

On the other hand - as I found out a few posts ago, waiting for the close hoping for the spread to come back on the close can be a costly experience! NFP numbers especially! Its a judgement call. This is another reason why the back spreads can be more newbie friendly. A spread on the fronts like H5Z5 could give you a massive drawdown if you're on the wrong side of the NFP number, but Z5Z6 probably wont go out by more than a couple of ticks on a NFP shocker.

If you want to get involved and have a futures account - have a fiddle!! See what you come up with, fine tune it a bit... just like any other strategy you put in the market.

 

[Beach Runner]

I've been having a fiddle - probably an accurate description!

...waiting for the close hoping for the spread to come back on the close can be a costly experience!

I tried waiting for the close last Friday (H5/M5). A modest profit zapped off the screen! I only did this as I keep reading that Joe Ross (didn't he once have a band?) dictum that one should only get out or enter on the close - and no offence meant to Mr. Ross here.

 

[BBB]

You may find that the wider out you go like H5H6 the less volatility you will get. Z5Z6 would be even less volatile/more certain. The cost however is obviously they dont move as far as quick. You need to decide if you want a smaller sure profit, or a stab at a larger profit.

The front month (H5) doesnt move much - 3.5 ticks today. So trading something like H5H6 would in fact be like trading H6 as an outright - but with reduced margin and slightly less vol.

Like anything, what ever spread you chose is generally down to individual style and comfort.

I've heard the Joe Ross spread stuff is good, but dont really have any first hand experience.

 

[Beach Runner]

BBB,

Thanks for the info. I've only been looking at roughly up to nine months out, although I noticed that M5/U5 seemed to be the less volatile (but there again, I've only been looking closely for the last three or four weeks which is hardly serious research!). I certainly found holding overnight without a stop a new experience - no matter how little volatility there was!

 

[BBB]

Nine months is the minimum I tend to look at (not saying that this is 'right', just that it suits my expectations and risk tolerance). The farthest is 15. Although a wider spread will imply more risk exposure per trade, it is a less risky trade if that makes sense. This is because I have found the wider spreads are more persistent than the choppy 3 & 6 months. To be fair though, this is probably a function of my trade management though as much as anything.

Dont worry about not having a stop. Thats the whole idea cos you're hedged! I'm sure this is obvious to you. I know what you mean though. I consider myself to be quite disciplined in my trading, but because I'm only taking positions on the close, I've been tempted to exit a trade a few times on the open or intra day, just to see it come back my way on the close (sometimes!). May be an idea to either take a smaller position or widen your expected 'mental stop' as exits will never be exact if you only take trades on the close.

 

[Beach Runner]

I definitely need to widen my 'mental stops'. Far too small. I've been looking at the ranges today (of the close) over the last month and have obviously, a lot of the time, been in the self destruct mode as I've taken myself out of the market! But I'm not going to beat myself up over this as it's a learning curve (one hopes).

I have done that thing of looking at the action during the day and thinking I need to exit now - not wait for the close; the one time I waited (or rather went into town) was the one day I'd have been better not waiting for the close. But I'm not doing any size at all and it is true that the movement of the spreads is fairly pedestrian. Or should I say dead over the last three days?

The other thing that I've noticed (over quite a longish time reading threads here and elsewhere) is how the massive amount of traffic in Eurodollars is contrasted by how few people ever write about them. This thread for instance has been going for quite a long time. And of course, I would not be writing too, if I had not only recently dipped my toe in the water. Just a thought. Oh, dear, perhaps they're all too busy taking profits. Now there's a thought.

 

[aerobinso]

Hi BBB and Beach runner,

Great thread you have going. I have to agree that there's not enough about ED spreads out there. They are such wonderful instruments.

Although I dabble in the Bonds, Notes, and currencies sometimes, I find myself drawn to the ED spreads (probably due to the relieved stress and better sleep ;-).

I've been following trading the H5-z5 spread for the last few weeks. It's great that these spreads allow a small account person to scale in and out with multiple contracts (and to follow long term trends like the big boys).

BBB--I'm curious about your comments regarding the separation time of the spread (3,6 months) and the distance of the spread (farther out months being less volatile). Are there any sources that elaborate on this?

Thanks!

 

[TWI]

One thing I have found useful with these interest rate spreads is to look down the curve and see how each of the 3 month spreads moves with respect to the outright future. You will often find that the front spreads move in the opposite direction to the outright and the back spreads move with it. There will be a spread at some point along the curve which does not move much at all. Once you have found this it offers some interesting possibilities. You can trade the pivotal 3month for a tick with relative safety from a blow out or trade spreads either side of it up and down the curve.
As for how long a spread to trade, I think this comes down to how much volume you are doing on a single trade and what you are looking to take out. Obviously for 1 tick in a 3 month a 9 month spread will move 3. Going out further than 12 months is probably not a good idea. I stick to 3,6 and 9.
One of the most useful things I have found are combinations of spreads that create derived instruments which stay range bound over a long time periods. My favourites include buying one 3 month selling twice as many of the next 3m and buying the 3rd 3m in the same volume as the first( or vice versa). I put these on in size when they go "out of line". It takes a lot of patience as these mis-valuations are not always available and often take a while to correct. Also need to do them in size as at most you are likely to take 4-6ticks maximum. 1 tick will only cover costs even if you are on professional rates.
Also worth looking at spreads such as Eurodollar/5year in addition to calendars in one market.

 

[Beach Runner]

Very, very interesting, twalker. I had remembered you mentioning some time ago how you looked at how the spreads moved against one another (I think you may have been writing about the euribor at the time, but the same applies). Thanks for the info. I had noticed that over the last few weeks that the first nine months moved on average from half a tick to three ticks, per day, depending on the spread. Mmm, food for thought.

aerobinso,
I'm flattered you've mentioned me re: great thread you guys have going. Thanks. But this is solely BBB's work, this thread (and others on it). I'm an interested student in this area - but we are surrounded by people with a lot of experience.

 

[BBB]

Thanks twalker - that looks like its worth studying. I would imagine that this concept works equally well with over night position trades (that I tend to focus on) and intraday positions (that I guess you are talking about)?

Aerobinso - what I was trying to get across was that a spread line of a 12 month spread will typically have less fluctuations (pull backs/corrections) than say a 3 month spread. I referred to this as volatility - which in fairness is't the right use of the term (infact its the complete opposite! DOH!!!) What I meant is the shorter the spread, the more it chops around. However, If you take a fixed period of time - say 1 month, then if a 3 month spread has moved up say 4 ticks in this time, then a 9 month spread will probably move 12 ticks in the same time period - so in that instance it is more volatile (not less as I stupidly stated earlier). Sorry for the confusion.

Guess I'll be adding a dictionary in my letter to Santa this year (if I'm not too late)!

 

[TWI]

BBB, I have actually started to hold these spreads for a lot longer than I used to due to the nature of the market not being quite what it was. The more complex structures i will regualrly now hold for days or weeks. An example was recently I went on 2 week holiday with 400 Euribor spreads open, I was hoping this would pay for my holiday but when I got back the structure had exactly the same value as when I went away with only a 1 point volatility during the interim. The following week it came 1 full point into the money so I thought that was an opportunity and took it. After another week it was 3.5 points in the money so definitely should have sat on it for longer.

 

[BBB]

lol - yea but thats the nature of this business. At least you did the right thing and took some money while it was there! If I had a pound for evry tear I shed over extra profits I could have taken, well...lets just say I dont think I'd be trading anymore!

That does sound like a good move for Euribor though - especially as the ECB aren't doing anything in the near future.

 

[Beach Runner]

I wrote: ...moved on average from half a tick

I meant half a point!

 

[aerobinso]

One thing I have found useful with these interest rate spreads is to look down the curve and see how each of the 3 month spreads moves with respect to the outright future. You will often find that the front spreads move in the opposite direction to the outright and the back spreads move with it. There will be a spread at some point along the curve which does not move much at all. Once you have found this it offers some interesting possibilities. You can trade the pivotal 3month for a tick with relative safety from a blow out or trade spreads either side of it up and down the curve.
As for how long a spread to trade, I think this comes down to how much volume you are doing on a single trade and what you are looking to take out. Obviously for 1 tick in a 3 month a 9 month spread will move 3. Going out further than 12 months is probably not a good idea. I stick to 3,6 and 9.
One of the most useful things I have found are combinations of spreads that create derived instruments which stay range bound over a long time periods. My favourites include buying one 3 month selling twice as many of the next 3m and buying the 3rd 3m in the same volume as the first( or vice versa). I put these on in size when they go "out of line". It takes a lot of patience as these mis-valuations are not always available and often take a while to correct. Also need to do them in size as at most you are likely to take 4-6ticks maximum. 1 tick will only cover costs even if you are on professional rates.
Also worth looking at spreads such as Eurodollar/5year in addition to calendars in one market.

Hi Twalker,

Thank you very much for this insight. This seems to be a very helpful way to decide amongst the different possible spread trades (there are so many to choose from in Eurodollars).

One clarification question: You mentioned setting up a "butterfly" (buying near and far, selling twice of the inside) and how it should be put on size when things get "out of line." What do you mean by "out of line"?

Thanks!

 

[aerobinso]

Thanks twalker - that looks like its worth studying. I would imagine that this concept works equally well with over night position trades (that I tend to focus on) and intraday positions (that I guess you are talking about)?

Aerobinso - what I was trying to get across was that a spread line of a 12 month spread will typically have less fluctuations (pull backs/corrections) than say a 3 month spread. I referred to this as volatility - which in fairness is't the right use of the term (infact its the complete opposite! DOH!!!) What I meant is the shorter the spread, the more it chops around. However, If you take a fixed period of time - say 1 month, then if a 3 month spread has moved up say 4 ticks in this time, then a 9 month spread will probably move 12 ticks in the same time period - so in that instance it is more volatile (not less as I stupidly stated earlier). Sorry for the confusion.

Guess I'll be adding a dictionary in my letter to Santa this year (if I'm not too late)!

Hi BBB,

Don't worry, we all have those moments. Actually, I knew exactly what you meant (have a background in options, and long term options are much less volatile than shorter term ones too). You're explanation definitely pointed out the pattern to look out for--just getting familiar with these spreads, and I've been trying to notice little characteristics about them. This one helps.

Thanks!

 

[TWI]

One clarification question: You mentioned setting up a "butterfly" (buying near and far, selling twice of the inside) and how it should be put on size when things get "out of line." What do you mean by "out of line"?

this is because I have tracked the relative prices for a long time but often it looks quite obvious. If Mar/Jun05 and Sep/Dec05 are trading a big premium to Jun/Sep05 then it would seem worth spreading them accordingly as a fly against a fly.

 

[zonetrader]

this is because I have tracked the relative prices for a long time but often it looks quite obvious. If Mar/Jun05 and Sep/Dec05 are trading a big premium to Jun/Sep05 then it would seem worth spreading them accordingly as a fly against a fly.

Hi twalker,

You seem so knowledgeable in the area of spreading Eurodollars, Eurolibor, can you please direct me on where to get articles or more information.

Thanks

 

[TWI]

zonetrader,
I am sorry to say I cannot be helpful re articles as I do not know of any on this subject, I learnt by being shown the basics by some x-floor traders who were successful on the screen and just took it from there myself.