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Trading calendar spreads?
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Trading calendar spreads?

  #1 (permalink)
Trading Apprentice
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Trading calendar spreads?

Beginner here. I started out trying scalping, and am quickly realizing it's not for me. The moves happen too quickly and for what seems like no reason. I also do a lot of long term investing in companies, and think I want to trade futures more with the fundamentals in mind.

So I thought I might try trading calendar spreads on commodities (CL, NG, etc). However, I see very little on this site (I am not an Elite Member) on the topic. Is this something others here do? Where can I find more information on this strategy?

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  #2 (permalink)
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  #3 (permalink)
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Hello,

I use futures spread trades (calendars) quite often.

I suggest setting up spread charts as you would with any other futures market you are watching to get a feel for market direction.

Moore Research Center offers a paid subscription for seasonal trades which includes futures spread trade recommendations. I've been a subscriber of theirs for many, many years (I get no compensation from them if you do sign up).

There's also a book out by Krill Perchanok called 'Futures Spreads' that has some good information in it. The book does read like microwave oven instructions but does cover some good points.

if you have any specific questions on a particular spread, let me know and I'll be happy to give you my opinion.

Best wishes,


Joe

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  #4 (permalink)
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@Sailboat, To see some examples go to tastytrade.com
and use the magnifying glass icon Search box for: “ calendar spreads futures “

Pete Mulmat is the main futures person at tastytrade. Has multiple shows per day. I believe he also takes email questions, and in one show he takes phone calls.
For more on him google “ tastytrade.com pete mulmat biography ''

Tom Sosnoff is the founder or maybe it's co-founder of tastytrade. Google will bring up much on him.

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  #5 (permalink)
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Sailboat View Post
Beginner here. I started out trying scalping, and am quickly realizing it's not for me. The moves happen too quickly and for what seems like no reason. I also do a lot of long term investing in companies, and think I want to trade futures more with the fundamentals in mind.

So I thought I might try trading calendar spreads on commodities (CL, NG, etc). However, I see very little on this site (I am not an Elite Member) on the topic. Is this something others here do? Where can I find more information on this strategy?

Saillboat,

I would try to discourage you from trading calendar spreads. I know very well the coffee, cocoa and sugar market for having worked with large institutions for over a decade now. I have also worked with Natural Gas liquifactor companies in Qatar.

Spreads are the first --and probably the only-- thing that is being riged by the big participants. This is because large trading houses have the physical so they can manipulate a spread and keep one leg open (e.g. stay short december, and long march and deliver their sugar to the exchange in december, receive it back in march), which pure futures trader can't do (unless you have tons of physical sugar to give them). This lead to price manipulation very often.

Maybe you could look at directional futures, where you hold a position for 3 months to 6 months, this may be closer to the "fundamental" look you have in mind and more fair to be honest. Crude Oil is a 9Bn$ a day commodity, I can guarantee you it's not being rigged by hedge funds and other participants..... just OPEC and macro / fundamental guys.

Hope this helps
Regards

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  #6 (permalink)
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Interesting posts and views, thank you. Responses to follow....

@wintergasp , I'm holding about 10 pounds of sugar in my kitchen.

Given my account size and tolerance for price swings, I should probably be trading the ETFs. But then that doesn't write the US Dollar out of the equation (for example) like a calendar spread does. A calendar spread struck me as a way to deleverage a bit and take out other variables from the trade. But if calendars are being manipulated....?

Do most of you guys trade outright contracts? Crack spreads seem interesting, but I am having trouble figuring out what those trades express. The change in the cost of refining a product?

I am a big fan of Tastytrade, but mostly for options trading. They have a decent futures program that I've been watching as well.

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  #7 (permalink)
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Sailboat View Post
Interesting posts and views, thank you. Responses to follow....

@wintergasp , I'm holding about 10 pounds of sugar in my kitchen.

Given my account size and tolerance for price swings, I should probably be trading the ETFs. But then that doesn't write the US Dollar out of the equation (for example) like a calendar spread does. A calendar spread struck me as a way to deleverage a bit and take out other variables from the trade. But if calendars are being manipulated....?

Do most of you guys trade outright contracts? Crack spreads seem interesting, but I am having trouble figuring out what those trades express. The change in the cost of refining a product?

I am a big fan of Tastytrade, but mostly for options trading. They have a decent futures program that I've been watching as well.

So in Crude Oil, there are a few guys who have worked as Civil Engineers for many years and can calculate the exact margin that a Refinery will make based on the price of different raw oils (bony light, WTS, WTI, etc.) and will arbitrage the prices before the refineries > this is because refineries are fairly efficient, they will buy whatever oil makes them the most money to refine, even if it's 0.000001$ more profitable, there is a rational decision.

I don't trade spreads, neither does anyone at the hedge fund I work for. Some funds specialize in trading spreads but it's usually guys who used to work at big trading houses for many years and who understand the way the trading houses speculate on the spreads.

We all trade outright futures, i.e. directional Long or Short. Crack spreads, if you mean spreads between different oil products is also a trading house game.

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  #8 (permalink)
Market Wizard
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Sailboat View Post
Beginner here. I started out trying scalping, and am quickly realizing it's not for me. The moves happen too quickly and for what seems like no reason. I also do a lot of long term investing in companies, and think I want to trade futures more with the fundamentals in mind.

So I thought I might try trading calendar spreads on commodities (CL, NG, etc). However, I see very little on this site (I am not an Elite Member) on the topic. Is this something others here do? Where can I find more information on this strategy?

Greetings @Sailboat. I saw your message a few days ago but unfortunately was too busy to reply until now.
Welcome to futures.io

You are correct there is very little futures spread trading discussion on futures.io. I think there are many reasons for this, and will attempt to name a few
  • A lot of traders here are trading using technical's and indicators but most of the conventional software doesn't have access to exchange traded spreads to chart.
  • Most back testing software use roll adjusted futures price in their back testing. As far as I know there is no way to roll adjust a spread so back testing spreads is more difficult to do.
  • There can be extreme seasonality in spreads (Think NG H/J - storage, RB U/V & H/J - spec changes) which means different spreads within the same commodity behave completely differently.
  • Spreads behave very differently than outrights
  • Some contracts don't really have spreads. There's a lot of ES traders here but ES spreads only trade right before expiration and then purely as a way to roll expirations
  • Retail trading cost structures are not conducive to spread trading. Lets assume you are paying $5 a round turn in commissions. If you assume 1 tic slippage on entry and exit your cost to open and close a futures position is $25 ($5 commission and $20 in slippage). The cost to enter a spread is slightly higher at $30 ($10 commission and $20 in slippage). Now consider in the last year the standard deviation of the daily change of CLZ6 is $1.05/bbl (or $1050/contract). Hence commissions and slippage represent just 2.4% of this number. The CLZ6-CLF7 spread on the other hand has a standard deviation of (the daily change of) just $0.024/bbl ($24 contract) which is LESS than the cost of commissions and slippage. Even if you consider CLZ6-CLZ7 a very liquid and quite volatile spread, the standard deviation of the daily change is just $0.214/bbl ($214 contract). So costs and commissions represent nearly 14% of that. To make things worse, with software that doesnt have access to exchange traded spreads, 1 tic slippage is probably a underestimation. Professionals on the other hand, in addition to having superior information also have access to a lower cost struucture and better trading tools.

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  #9 (permalink)
Market Wizard
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wintergasp View Post
Spreads are the first --and probably the only-- thing that is being riged by the big participants. This is because large trading houses have the physical so they can manipulate a spread and keep one leg open (e.g. stay short december, and long march and deliver their sugar to the exchange in december, receive it back in march), which pure futures trader can't do (unless you have tons of physical sugar to give them). This lead to price manipulation very often.

@wintergasp makes some excellent points. Spreads - especially prompt spreads, are the domain of trading houses that have the ability to back up their financial positions with the physical.

For example NYMEX's CL or Light Sweet Crude Oil Contract (often incorrectly referred to as the WTI contract) calls for Crude Oil to be delivered to a storage facility in Cushing OK. Many people have or lease storage there, but one international oil major is known to have significant storage there, and has a dedicated pipeline from there to their refinery which process's 430,000 barrel's of crude a day. As you can imagine it kind of gives them an advantage! Just to make things worse the afore mentioned company has been sanctioned twice in the recent past for manipulating commodity prices, but not oil prices.

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  #10 (permalink)
Market Wizard
Houston, TX
 
Futures Experience: Advanced
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Favorite Futures: Energy
 
Posts: 2,117 since Dec 2013
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Sailboat View Post
Beginner here. I started out trying scalping, and am quickly realizing it's not for me. The moves happen too quickly and for what seems like no reason. I also do a lot of long term investing in companies, and think I want to trade futures more with the fundamentals in mind.

So I thought I might try trading calendar spreads on commodities (CL, NG, etc). However, I see very little on this site (I am not an Elite Member) on the topic. Is this something others here do? Where can I find more information on this strategy?


SMCJB View Post
Greetings @Sailboat. I saw your message a few days ago but unfortunately was too busy to reply until now.
Welcome to futures.io

You are correct there is very little futures spread trading discussion on futures.io. I think there are many reasons for this, and will attempt to name a few
  • A lot of traders here are trading using technical's and indicators but most of the conventional software doesn't have access to exchange traded spreads to chart.
  • Most back testing software use roll adjusted futures price in their back testing. As far as I know there is no way to roll adjust a spread so back testing spreads is more difficult to do.
  • There can be extreme seasonality in spreads (Think NG H/J - storage, RB U/V & H/J - spec changes) which means different spreads within the same commodity behave completely differently.
  • Spreads behave very differently than outrights
  • Some contracts don't really have spreads. There's a lot of ES traders here but ES spreads only trade right before expiration and then purely as a way to roll expirations
  • Retail trading cost structures are not conducive to spread trading. Lets assume you are paying $5 a round turn in commissions. If you assume 1 tic slippage on entry and exit your cost to open and close a futures position is $25 ($5 commission and $20 in slippage). The cost to enter a spread is slightly higher at $30 ($10 commission and $20 in slippage). Now consider in the last year the standard deviation of the daily change of CLZ6 is $1.05/bbl (or $1050/contract). Hence commissions and slippage represent just 2.4% of this number. The CLZ6-CLF7 spread on the other hand has a standard deviation of (the daily change of) just $0.024/bbl ($24 contract) which is LESS than the cost of commissions and slippage. Even if you consider CLZ6-CLZ7 a very liquid and quite volatile spread, the standard deviation of the daily change is just $0.214/bbl ($214 contract). So costs and commissions represent nearly 14% of that. To make things worse, with software that doesnt have access to exchange traded spreads, 1 tic slippage is probably a underestimation. Professionals on the other hand, in addition to having superior information also have access to a lower cost struucture and better trading tools.

Of course another reason is that a lot of spread trading is done by institutions, banks and trading houses. And not many of their employees are on forums like this discussing their trading strategies!

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