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Bond butterflies


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Bond butterflies

  #21 (permalink)
bpee18
Brisbane, QLD, Australia
 
Posts: 2 since Mar 2017
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Hi everyone,

I am just getting familiar with charting bonds and seeing their movements. I was wondering if someone could share how to chart a bond butterfly eg. ZN fly.

I understand charting the FIT and NOB respectively as the difference between the two with DV01 neutrality. I'm just not sure about the formula to chart the ZN fly....

Thanks very much for your help.

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  #22 (permalink)
 jstnbrg 
Chicago, Illinois
 
Experience: Advanced
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It's been many years since I did this and I never did much of it (and I didn't need to chart it) but I think you chart the body minus the wings. If you're talking about the ZN butterfly that means you are, for example, long ZNZ7/short ZNH8 and against that you are short ZNH8/long ZNM8. So you are long one unit of ZNZ7 short two units ZNH8 long one unit ZNM8 (and this would make you short the 'fly.).

Obviously you could chart it either way (long or short the "body") and one chart would just be the inverse of the other, so unless you are collaborating with other butterfly traders it wouldn't matter which way you did it, the signals would occur at the same places either way.

I'm a little curious why you want to do this. It's expensive unless you're an exchange member or are trading large volumes and you incur a lot of execution risk if you're legging the spreads, and you're competing against a community of professional traders who do it for a living.

Just for the record, I scalped in the Five Year Note pit for 14 years, the Muni pit for two years before that, and on the screen trading the NOB and the FITE for four years after I left the pits. Some very large traders traded the intermarket butterflies, but they mostly did it defensively to "hedge" difficult positions. While I never agreed with the strategy, because I just prefer to get out of bad trades and start over rather than hedging them, the people who did it made a lot of money. The best was probably Frank Brumfeld, brother of Trading Technologies founder Harris Brumfeld.

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  #23 (permalink)
bpee18
Brisbane, QLD, Australia
 
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jstnbrg View Post
It's been many years since I did this and I never did much of it (and I didn't need to chart it) but I think you chart the body minus the wings. If you're talking about the ZN butterfly that means you are, for example, long ZNZ7/short ZNH8 and against that you are short ZNH8/long ZNM8. So you are long one unit of ZNZ7 short two units ZNH8 long one unit ZNM8.

Obviously you could chart it either way (long or short the "body") and one chart would just be the inverse of the other, so unless you are collaborating with other butterfly traders it wouldn't matter which way you did it, the signals would occur at the same places either way.

I'm a little curious why you want to do this. It's expensive unless you're an exchange member or are trading large volumes and you incur a lot of execution risk if you're legging the spreads, and you're competing against a community of professional traders who do it for a living.

Just for the record, I scalped in the Five Year Note pit for 14 years, the Muni pit for two years before that, and on the screen trading the NOB and the FITE for four years after I left the pits. Some very large traders traded the intermarket butterflies, but they mostly did it defensively to "hedge" difficult positions. While I never agreed with the strategy, because I just prefer to get out of bad trades and start over rather than hedging them, the people who did it made a lot of money. The best was probably Frank Brumfeld, brother of Trading Technologies founder Harris Brumfeld.


Thanks very much for your reply and feedback. However just to clarify my initial question, I was referring to bond spreads on the yield curve instead of calendar spreads on the one product, ie: trading the ZN outright based on relative value of ZF and ZB, or otherwise legging into the spread between the products, ZN in this example being the body, ZF, and ZB being the wings.

What would be the formula for a butterfly here? I am confused about how to incorporate DV neutrality into the formula. Obviously one would have to use the CME's quarterly intercommodity spread ratios.

Further, I understand some brokers acknowledge correlations in these products and allow significantly smaller margin requirementsas a result, allowing one to trade with relatively small accounts. To note, I am looking at trading these spreads on a swing trade type basis.

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  #24 (permalink)
 platon 
Sweden
 
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Here is an example in Sierra Chart.

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  #25 (permalink)
DuckDodgers
Rochdale UK
 
Posts: 13 since Jan 2016
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bpee18 View Post
Hi everyone,

I am just getting familiar with charting bonds and seeing their movements. I was wondering if someone could share how to chart a bond butterfly eg. ZN fly.

I understand charting the FIT and NOB respectively as the difference between the two with DV01 neutrality. I'm just not sure about the formula to chart the ZN fly....

Thanks very much for your help.

Hi

The ratios can be found on the CME website

Intercommodity Treasury and Swap Spreads

Usually in PDF format and may change slightly depending on which contracts you're trading. Best check on each rollover..


I definietly recommend Jonathan Rose @ ActiveDayTrader's Bond Boot camp as he teachs this exact methodology.

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  #26 (permalink)
 jstnbrg 
Chicago, Illinois
 
Experience: Advanced
Platform: Ninjatrader, TT, InvestorRT
Broker: Advantage Futures, Ninja/TT and InvestorRT/IQFeed.
Trading: Treasury futures
Posts: 312 since Nov 2010
Thanks Given: 194
Thanks Received: 911


bpee18 View Post
Thanks very much for your reply and feedback. However just to clarify my initial question, I was referring to bond spreads on the yield curve instead of calendar spreads on the one product, ie: trading the ZN outright based on relative value of ZF and ZB, or otherwise legging into the spread between the products, ZN in this example being the body, ZF, and ZB being the wings.

What would be the formula for a butterfly here? I am confused about how to incorporate DV neutrality into the formula. Obviously one would have to use the CME's quarterly intercommodity spread ratios.

Further, I understand some brokers acknowledge correlations in these products and allow significantly smaller margin requirementsas a result, allowing one to trade with relatively small accounts. To note, I am looking at trading these spreads on a swing trade type basis.

I used the example I did because you said you were trading ZN spreads. The principle is the same whether you're trading calendar spreads or the yield curve. If the FITE is trading 3:2 and the NOB is trading 2:1, the 5:10:30 butterfly would trade 3:4:1. (By the way, in my example using calendar spreads I assumed the spread traded 1:1. That is actually rarely the case, although we traded them that way in the pit during rollover.

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Last Updated on September 28, 2017


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