How?

[Thirteen]

hi traders.

id be interested in hearing how you guys trade futures.

do you guys trade spreads, patterns, scalp, indicators, arbs...

why?

iv been trading a short while, mostly candle setups with support/resistance, ok, but someone tells me spreads are the beef. wanna find other ways.

 

[volatileN]

I am not much of a futures fan (costs of dealing are too high) but my nexd door neighbour spreads the Bund futures against the Bobl futures for a living. He has an average return of 8 ticks a day for 3 years... maybe investigate that. They are traded on EUREX.

 

[Thirteen]

thanks. i hear spreads are quite safe way to trade and the reduced margin allows morebang for buck - that offsets the volatility of a single outright/leg. is this true.

do you know any good books where i can find out more about spreads. exchange sites are limitied.

 

[volatileN]

There is not a huge amount to know, I dont see that someone could write a whole book on it. What I would od is get a load of historic data on the futures (you can buy this from many of the exchanges) and run back tests in excel. Inter month spreads are also worth looking at but you can end up having to roll the legs and this can become costly.

As with any stat arb type strategy I would look at the data and find the spreads with the best mean reversion and back test alowing for friction.

Cheers,

VN

 

[anley]

Volatile

How can you say that the cost of futures trading is high? Are you using Berkely Futures as your broker

Take an S&P future trading at 1100, that's a nominal amount of $275,000. Comms at what $2-$3 a side plus a tick bid-offer make total costs of around $27.50.

That translates into 0.01%.

 

[volatileN]

Volatile

How can you say that the cost of futures trading is high? Are you using Berkely Futures as your broker

Take an S&P future trading at 1100, that's a nominal amount of $275,000. Comms at what $2-$3 a side plus a tick bid-offer make total costs of around $27.50.

That translates into 0.01%.

The cost of trading most futures is high in most markets. As you so articulately point out the S&Ps are cheap to trade, this is also the case with a few of the major rate futures.

You refer however to the most liquid contracts in the market. With the occasional exception of the front months the SSFs and commodities have spreads a mile wide. You can get a far better deal on the same contracts with the same specs (or your customised variation thereof) swapped against 3m libor from any of the banks.

Next time I make a general reference to the illiquidity of any instrument I will be sure to specify a list of the exceptions.

My apologies to the good people at the exchanges and the more pedantic amongst us here at T2W.

Cheers,

VN

 

[anley]

Volatile

I disagree with you. Most if not all of the major commodities, metals, grains, energy etc are as cheap as the stock indexes to trade and so are bond futures and short term money. I haven't looked at cash bonds or 3 cash month money but I'd expect the bid-offer to be a tick as well, just like the futures.

Bottom line, as long as one doesn't trade OJ futures or some other small time market, futures are some of the the cheapest financial products (to trade) on the planet.

 

[volatileN]

Volatile

I disagree with you. Most if not all of the major commodities, metals, grains, energy etc are as cheap as the stock indexes to trade and so are bond futures and short term money. I haven't looked at cash bonds or 3 cash month money but I'd expect the bid-offer to be a tick as well, just like the futures.

Bottom line, as long as one doesn't trade OJ futures or some other small time market, futures are some of the the cheapest financial products (to trade) on the planet.

Relative to many of the exchange traded assets, if you are only referring to the front months of the contracts, I do not disagree. This front month bias is particularly restrictive though as it means that any requirement for exposure beyond that tenor can not be met at reasonable cost.

Rather my comparison is to the OTC and interbank rates, relative to which futures are very expensive to get in and out of.

The liquidity simply isn’t there for strategies that rely on inter month spreading etc where the DV01 is large and margins are low.

 

[anley]

I agree with you on the front month but then a) most people here are speculators and therefore the frontmonth is perfect and b) 95% of this board is retail therefore cash markets are not only alien to us all but also impossible to trade.

But even with roll-over costs are these not included in the cost of carry type equations otherwise I'd suspect you'd have little or no institutional business in futures, they'd all trade OTC.

 

[volatileN]

There is very little institutional business in the futures. Most of the institutional business is done in swaps which synthesise the futures through similar but bespoke contract conditions. The reason for this is that... they are cheaper!

Of course most people on the board ('entitled "trade2win") are speculators. I am sure though that many of them are operating spreading systems and are therefore sensitive to friction.

I lack both the time and inclination to pursue a subjective discussion on ones 'feelings' about the value for money that futures commissions represent and therefore request that we end this conversation here.

Thank you,

VN

 

[anley]

Yep, let's end it here, but ponder one question.

When the bund trades over 1 million contracts on a busy day, that's a crap load of business for non-institutional market participants to conduct.

1,000,000 x E100,000 = 100 billion Euros

 

[volatileN]

Again, you highlight the exception (Bund, Bobl, Schatz, SPX etc). These are just a few amongst a universe of 1000s.

Thank you for a worthwhile and meaningful discussion.

Yours,

VN

 

[stevecartwright]

Can someone explain briefly how you make a profit out of a Spread. I generally trade options, writing PUTs, but I have recently ben reading the Joe Ross trading manual and it talks of trading Futures Spreads. whilst I understand buying and selling the same commodity/index etc I can't see where the profit comes from. If one goes up the other goes down! Is there some time value as in Traded options. Any help gratefully received.

PS It also say's its a best kept secret. To right I can't find any info.

 

[BBB]

You make the money on the differential between the long and short legs.

The aim is to trade a spread where one leg is moving faster than the other, or both legs are diverging (bull) or converging (bear). This way, you dont care about the direction of the market, only the differential between the two legs. This works well with futures, because the differential will be persistent over time as there will usually be solid economic reasons for the differential - such as harvesting and planting delivery months in the grains (supply and demand). Try a Google search!!!

 

[neil]

not necessary to go "UP" and "Down"... a spread can be made of a near and far contract in same commodity, say long march wheat and short Sept wheat....the result is that one goes up faster than the other or vice versa. I think you then deduct the one from the
other and what is left is, hopefully, profit.


Others more experienced than I can probably offer other explanations.

 

[TWI]

Good to consider each wider spread as a sum of components so a Sep04-Sep05 is in fact Sep04-Dec-04 + Dec-04-Mar-05 + Mar05-June05 + June05-Sep05. Looking at it in this way will allow you to arb spreads against each other a little.

 

[stevecartwright]

Thanks BBB. It sounds as though this is a commodities thing whereas I have only traded stocks. I have done a search but the results were less than inspiring. There are a couple of books mentioned above which I think may be worth the investment.

 

[BBB]

Try looking at the pairs trading threads. Market neutral strategy using stocks.

 

[josbarr]

Spreads in Options can reduce risk (Bull, Butterfly) as well.