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bond future trading question
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bond future trading question

  #1 (permalink)
Trading Apprentice
tel aviv, israel
 
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bond future trading question

hi all,

i'm trying to build an automatic system to trade the bobl (fgbm). my knowledge regarding trading bond's futures is not much, and it mostly consist of "reading the web" and some friend's help. till now i moslty traded options.

during my tests, i've reached to some questions that left unanswered, i would appreciate if someone has guiding answers or new thinking aspects. my basic approach was to calculate a fair value of the future (derived from bonds value, other futures value, and some smooth processes) and though i've got a good resault, i found it hard to trade that way the bobl , i.e, even when i entered into good position caused by temporary mispriced future , i'm still being exposed to whole market moves (which not reflected in my model).

1. does someone uses this method of trading? (calculating fair value) or should i focus trading "technical analysis" style? (direction of market, levels of price and other common indicators)
2. i think to reduce my exposure to market moves, by hedging my position in a "pair trading" manner (trading fgbl). is this a good way? should i try trading "basket" of futures for hedging?

thanks ahead,
(its my first post, so, i'll be happy to clarify my problem again...)

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  #3 (permalink)
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A known way for pairs trading is trading the NOB spread (Notes Over Bond spread). This reduces market exposure, but does not eliminate it. You could also trade the FGBL or FGBM against Italian bonds (FBTP).

I am not trading spreads because I believe that I have higher transaction costs than the larger traders or banks, so I am only doing outrights. But this is certainly a question of the holding time. If you keep the spread long enough, then transaction costs will be small compared to results.

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  #4 (permalink)
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Something to think about, is that you are not required to use any of the classic weightings such as 2:1 NOB for example.

One strategy I was always fond of was trading 1:1 NOB as a way to catch counter trend moves. It makes for a fairly cheap way to pick tops and bottoms, without having to use such tight stops.

"If I agreed with you, we'd both be wrong."
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addchild View Post
... trading 1:1 NOB as a way to catch counter trend moves...

hi addchild, thnx for your answer.
i didnt understand how come trading the NOB is a way to catch counter trends nor tops or bottoms.
as far as i understand, such a trade isnt gonna profit from misspriced assets (cause than one should trade the 2 assets at the right ratio) and it gonna profit only if the market will move "with" my more volatile leg (bond).

am i missing something?

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Fat Tails View Post
If you keep the spread long enough, then transaction costs will be small compared to results.

so, if my goal is intraday trading, do you think that pair trading in that manner, isnt a good idea? (due to widening process of the spread)

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yuak View Post
hi addchild, thnx for your answer.
i didnt understand how come trading the NOB is a way to catch counter trends nor tops or bottoms.
as far as i understand, such a trade isnt gonna profit from misspriced assets (cause than one should trade the 2 assets at the right ratio) and it gonna profit only if the market will move "with" my more volatile leg (bond).

am i missing something?


The purpose is to catch the directional move in the more volatile instrument, and de-leverage with the less volatile.

in this specific example, trading the trading either the ZB ( 30yr) or UB ( 30yr with greater than 25 years till maturity) against the ZN ( 10 year )

Now GENERALLY, the farther out on the yield curve the greater the volatility, and with it, a larger trading range. For a practical example UB will over extend almost every single move relative to ZN, from both sides neutral.

So if I had a directional idea to trade in UB I could express it as a spread, capturing the excess volatility of being farther out on the YC, without getting too much of a haircut if I'm wrong.

"If I agreed with you, we'd both be wrong."
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