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  #1 (permalink)
 crito 
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hi,

I'm looking for spread traders to share ideas with.
i have been trading futures and future optinos for many years and am now looking into (future) spread trading.
i can find only a few threads about spreads so hopefully there are some people out there...

you can either reply on this therad or send me an inmail.

to make it a bit more concrete, i have been looking at the following spread:
sell NGH14 buy NGJ14
comment welcome,

have a good Xmas!

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crito View Post
hi,

I'm looking for spread traders to share ideas with.
i have been trading futures and future optinos for many years and am now looking into (future) spread trading.
i can find only a few threads about spreads so hopefully there are some people out there...

you can either reply on this therad or send me an inmail.

to make it a bit more concrete, i have been looking at the following spread:
sell NGH14 buy NGJ14
comment welcome,

have a good Xmas!

I assume you've looked at the seasonality of this over the years?

What is your entry trigger?

If trade goes bad, where is your exit? How will the order be placed (stop, market order, etc)?

Do you have a profit target, or a date when the trade will be over?

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 kevinkdog   is a Vendor
 
 
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Also, what's your position sizing look like, and how is it impacted by the spread margin requirement?

No need for you to provide specifics, just something to think about. Many people starting to spread trade think the risk is less, and therefore pile on with the contracts. Trust me, you can lose money just as fast with spreads as with the outrights.

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 crito 
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Hi kevin,

Instead of answering your questions let me ask you what you think the risks for this particular trade are and how you would trade it if you did.

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crito View Post
Hi kevin,

Instead of answering your questions let me ask you what you think the risks for this particular trade are and how you would trade it if you did.

My reply already has that info: I'd be worried about seasonality in general, how this year looks relative to past years, finding the right entry point (are you trying to time the peak in NGH14), exit point / stop (this spread has moved over $2K per contract since Dec 1, so if you had put it on then you'd have been crushed), and position sizing.

Since I have not considered putting on this trade (I am short NGH14 calls, but that is a different beast), I'll refrain from giving personal opinion (after all, what do I know?). I've given you areas I would look at though.

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 SMCJB 
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Take a look at this thread HERE the last 18 pages (page 252+) are pretty much all about March NG and to a slightly lesser extent the March-April NG spread.

Quoting myself...


SMCJB View Post
One thing you need to remember is that not only is Natural Gas a real commodity, with real supply and demand, but it's also an essential commodity. If we run out of natural gas, power plants shut down and houses go dark, grandma's heater doesn't switch on and people can die. While this might sound sensationalist, rolling blackouts in the summer have caused people to die on several occasions, and the fear is real for many people. (Although I don't recall us ever actually running out of Gas in the winter). For this reason you can see scarcity pricing occur in Natural Gas (and even more so Electricity) that you will never see in other commodities. This also effects implied volatility and skew in ways you rarely see in other markets as well.

PBS did a documentary back in 2001, where they interviewed several Natural Gas traders including Bo Collins who would later become President of the NYMEX before it was bought by the CME. You can watch the show and see the transcript here. At one point Bo tries to explain scarcity pricing to the reporter by equating it to a man in a desert.
BO COLLINS: If you don't have water to drink, on your first hour of not having water, what will you pay for it?
PAUL SOLMAN: Well, I start to...
BO COLLINS: You don't care that much.
PAUL SOLMAN: Right, I don't care.
BO COLLINS: In... 12 hours later, you're a little thirsty; what's the value of water?
PAUL SOLMAN: It's getting there.
BO COLLINS: Two weeks later, if you're still alive, you'll probably give everything that you have in your bank account for that glass of water.
Interestingly Foster Smith another trader interviewed in the documentary makes the following comments about some 2001 price moves...
FOSTER SMITH: We basically traded from $5.70 up to $6.94 in two days, a pretty large move. We're talking about, you know, a 20 percent move in two days, which... that would be like the Dow going up 2,000 points in two days. That'd be a talkable event.
PAUL SOLMAN: And when the forecast changed just over the weekend...
FOSTER SMITH: Prices came off almost immediately. We opened up at $6.20 yesterday, which was down almost 60 cents, and it went down to $5.70 in about 30 minutes. So we lost everything we'd gained in two days in about 45 minutes.
Back to Natural Gas ... In the US, we use a lot more Natural Gas in the winter than we do in the summer. Since production is relatively balanced year round, we inject massive amounts of natural gas into underground storage April thru October and then remove it December through March. (At it's peak US Natural Gas stoarge represents approximately 15% of annual demand.)

Consumption is very weather dependant but nearly always highest in Januray, followed by December & February. Hence its not surprising that January is the peak of the curve when you look at prices on a forward basis. But if we have a very cold winter, and storage starts running low, it's not January you need to be worried about but March. No matter how cold it gets in January, there will always be enough gas in storage to meet demand. If we were ever to run out of gas in the Winter, it would probably be because of demand in January & February but we would actually run out in March. Hence we have the phenominoum that all the fear factor is pushed into March.

April on the other hand, is the first month of next years injection season. If we run out of gas in March, prices will be higher in April and through out the summer than normal, but not that high, and we will never run out of gas in April. Hence April always has to price itself as the first injection month for the following winter. Hence March prices have the potential to completely detach from April and beyond pricing.

Now consider what happens if we get to March and we have plenty of natural gas. The gas in storage that won't get used now has to price itself to stay in storage for the following winter. Hence March drops to a discount to April! As you can see the dynamics of the March-April spread can vary enormously! If the price dynamics of March seem like they can be a roller coaster - just imagine what the implied volatility can do! To make things even more interesting, CME and ICE both trade and clear, spread options on the March-April spread.

When Bo Collins left his position of NYMEX President he set up a hedge fund called Motherrock. After some early impressive gains the Hedge Fund went down in 2006, rumored to having lost over $200M trading March-April NG spreads and associated option contracts. They were squeezed out by Brian Hunter and Amaranth. In the next 12 months Amaranth went on to lose $6.6 Billion, a lot of which was again lost in March-April spreads (and also Oct-Jan spreads). The big winners were rumored to be Centaurus (aka John Arnold), Citadel and JP Morgan. If you would like to see some interesting implied vols try and get some historical quotes for upside March'06 and March'07 calls.

March-April is the ultimate fear trade, short squeeze trade, and path dependent trade. Every year it trades at a significant premium, and in most years it settles at flat or more often negative (2003 settled $1.74). The question is, can you handle the drawdowns before this happens. Even this year with the much smaller 40c moves, lots of money is rumored to have changed hands.

I know this sounds very sensationalist, and in reality the current increased supply picture means the prices we saw in March-April in the 2000's probably won't materialize again soon. But the facts are Billions have been lost trading this spread over the years.

March April through the Years ($/MMBtu)

March April through the Years (March % Premium to April)


SMCJB View Post
Last 5 years March April


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 indiantrader 
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NG on its daily chart has a breakout form previous resistance and is on way to move to 5 btu, currently at 4.441.
The NG H4:NGJ4 will also move up along with the outright for some more time and I would in fact go long on it with holding time of about a month if I have to trade this spread. Since the spread moves with the outright, there is not much difference in trading the calendar and the outright.
However, NG is extremely volatile and calender spreads too. Its better to combine calenders to form better looking flys/condors which have a smaller trading range and trade that with shorter holding periods.
I am still paper trading spreads and no experience with live trading spreads yet.

check the pics of this spread.

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 crito 
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Thanks smcjb,
Very interesting, i noticed the seasonal pattern but didn’t know the reason.

>March-April is the ultimate fear trade, short squeeze trade, and path dependent trade. Every year it trades at a significant premium, and in most years it settles at flat or more often negative (2003 settled $1.74). The question is, can you handle the drawdowns before this happens.
I guess that is what it’s all about.

I looked up the 2006 & 2007 spreads see screenshots below (bottom two are the spreads in us$ and normal points).
I think those years are different from the current situation but it good to see the spread can go to $3.5 or $35,000.
First the NG (& spread) price was high during summer and came down in the fall in both cases so no fear there after dec. 31
And as your own last charts shows, in the last 5 years only 2010 had a bit of an up move in the new year (about 0.17?)

I plan to sit out the ride, or close if the spread gets above 0.70. No better way to learn than to ride the beast ;-)



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 crito 
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Hi Indiantrader,

Any other spreads you are papertrading currently? (And you are willing to share)
Or any more general tips or good books you can give a starting spread trader?

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 crito 
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@kevinkdog
thanks for the insides.
Do you trade spreads? And if so any open positions that you are willing to share?

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 indiantrader 
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crito View Post
Hi Indiantrader,

Any other spreads you are papertrading currently? (And you are willing to share)
Or any more general tips or good books you can give a starting spread trader?


I am long on 6E - 6A * 2 as continued weakness is expected in AUD and EUR is more or less range bound.

Other spreads I am looking at are long on heating oil crack during winter months and fundamentals and middle eastern concerns on crude oil are eased.

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 crito 
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indiantrader View Post
I am long on 6E - 6A * 2 as continued weakness is expected in AUD and EUR is more or less range bound.

Other spreads I am looking at are long on heating oil crack during winter months and fundamentals and middle eastern concerns on crude oil are eased.

Hi Indiantrader,
Regarding the energy spread

What ratio are you looking at?
3:2:1 CL:RB:HO (2*42*/RB)+(42*/HO)-(3*/CL)
1:1 CL:RB (42*/RB)-/CL
1:1 CL:HO

Below the 1x HOh - 1x CLh for the last 8 years, (spread in us$).
In the last 3 years you can see it start going up around 1 jan.
is that what you have in mind?


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 SMCJB 
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crito View Post
I looked up the 2006 & 2007 spreads see screenshots below (bottom two are the spreads in us$ and normal points).

I think those years are different from the current situation but it good to see the spread can go to $3.5 or $35,0000.

2006 & 2007 were the height/end/demise of Amaranth

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 indiantrader 
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crito View Post
Hi Indiantrader,
Regarding the energy spread

What ratio are you looking at?
3:2:1 CL:RB:HO (2*42*/RB)+(42*/HO)-(3*/CL)
1:1 CL:RB (42*/RB)-/CL
1:1 CL:HO

Below the 1x HOh - 1x CLh for the last 8 years, (spread in us$).
In the last 3 years you can see it start going up around 1 jan.
is that what you have in mind?


@crito

I spoke about HO:CL spread considering current fundamental scenario and took a long on it after technicals confirmed the fundamentals. The 3:2:1 crack spread also follows HO:CL spread but RBOB gasoline correlation is not so good with CL as that of HO.

Another idea is about treasuries. With the recent taper in QE and Fed's plan to keep low rates for a long term, the yield curve is going to be more sloping since decisions on interest rates affects short term treasuries more. With that in mind, I am looking to go long on the ZN:ZB(10 vs 30 years) or ZB:USB( classic vs ultra) spreads and waiting for technicals to confirm.

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indiantrader View Post
Another idea is about treasuries. With the recent taper in QE and Fed's plan to keep low rates for a long term, the yield curve is going to be more sloping since decisions on interest rates affects short term treasuries more. With that in mind, I am looking to go long on the ZN:ZB(10 vs 30 years) or ZB:USB( classic vs ultra) spreads and waiting for technicals to confirm.

Except that 10 year is not a short term rate -- not one that the Fed influences as much as the 2 year anyway, for example. Here are rates from last Wed (date of taper announcement) until yesterday, with the % change:



Over the short term (since last wednesday as shown) and long term (a year), the 10-30 spread has flattened. The 2-year has flattened against everything longer than it, as has the 5. In other words, the Fed's immediate decisions over policy are not as visible in the long end (10-30 yr) as they are in the short end (1-5 yr).

Maybe a 5-30 or a 2-10 would be a better spread to take advantage of the short-term Fed decisions. Just to be clear, I'm not saying the 10-30 steepener won't work, I'm just saying that it is not as sensitive to your trade premise as another spread might be. @tigertrader , is my logic right on this?

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josh View Post
Except that 10 year is not a short term rate -- not one that the Fed influences as much as the 2 year anyway, for example. Here are rates from last Wed (date of taper announcement) until yesterday, with the % change:



Over the short term (since last wednesday as shown) and long term (a year), the 10-30 spread has flattened. The 2-year has flattened against everything longer than it, as has the 5. In other words, the Fed's immediate decisions over policy are not as visible in the long end (10-30 yr) as they are in the short end (1-5 yr).

Maybe a 5-30 or a 2-10 would be a better spread to take advantage of the short-term Fed decisions. Just to be clear, I'm not saying the 10-30 steepener won't work, I'm just saying that it is not as sensitive to your trade premise as another spread might be. @tigertrader , is my logic right on this?

@josh

Sure the 2,3 and 5 years notes are more affected by the taper decision. The only advantage of 10-30 spread is higher trading range and higher liquidity.
Since the yields on short -term treasuries are expected to decrease, the yield curve is expected to lower on the short end which will raise the curve as a whole. All these are just presumptions and actual trades will be taken only on confirmation on price action and a technical model.

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 crito 
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hi,

If you set out all NG futures you get the chart below.
i guess the wave pattern is the seasonal pattern.
but i hope somebody can tell me why we seem to bottom at april 2016?
is that purely theoratically or is something really happening? to go from backwardation to contango.
i can imagine that at some point storage , interest etc kick in but you don't see this pattern at CL so that can't be it. (and it can't be energy as a whole since than you would see it at CL too, so is a NG thing)
there must be another reason? perhaps gas to liquid refineries start up or ports opening?
anybody?

And second, what would be wrong with the idea to buy the lowest (april 2016) for 4,000 and sell the current NG contract? to start a long term spread?




@indiantrader, i never traded treasuries so would have to look into that.
On the crack spread, if i had to purely spaculate i agree the changes of the spread going up seem somewhat more likely than down but if i look at the charts it seems that after a long and steady down period you have a better change of it to go up and although normally in the first few months of the year that happend (this time) already in the fall of 2013, but perhaps we get another up...

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 indiantrader 
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@crito

The big players in energy markets like NG are oil refinaries, oil products commercial traders. The profit for commercial traders is the crack spread ie the difference between crude oil and the products. They employ different hedging strategies involving multiple expiries for next few years to protect their profits.
The wave pattern you see is probably due to relatively higher volumes in the june and december.
The volumes and open interest are very low after 2015 dec.

https://www.cmegroup.com/trading/energy/natural-gas/natural-gas_quotes_volume_voi.html

For speculative purposes, the trader should only use contracts with high open interest and good liquidity, so looking beyond 2015 may serve no purpose for speculative trader.

For eurodollars, you would see good volume and open interest right till 2019-20.

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 SMCJB 
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crito View Post
but i hope somebody can tell me why we seem to bottom at april 2016?

Lowest month of the year is nearly always April/May as thats when we start filling storage.
2016 is the lowest year on the curve because LNG exports expected to start in 2017

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 SMCJB 
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indiantrader View Post
The wave pattern you see is probably due to relatively higher volumes in the june and december.
The volumes and open interest are very low after 2015 dec.

Your confusing crude and natural gas. While you are correct that crude trades mostly in June's and Dec's that's not the case in Natural Gas.

NG is a seasonal product where we fill storage for 7 months of the year and then take it out in 4 months. While crude trades Dec-Dec spreads mostly the key spreads in NG are Apr-Oct (reflects the summer injection premium), Oct-Jan (represents the summer-winter injection premium) and Mar-Apr (reflects the change of season from withdrawing back to refilling.


indiantrader View Post
The volumes and open interest are very low after 2015 dec.
https://www.cmegroup.com/trading/energy/natural-gas/natural-gas_quotes_volume_voi.html

Try looking at ICE you'll see a very different picture. That's where long dated Natural Gas is traded. While average OI on CME for 2017 is in the 200-300 contracts/mth range on ICE it's 4000-6000 contracts/mth (adjusted for contract size). While CME only has odd lot OI past 2018, ICE has OI greater than 100/month out through 2024.


indiantrader View Post
For speculative purposes, the trader should only use contracts with high open interest and good liquidity, so looking beyond 2015 may serve no purpose for speculative trader.
For eurodollars, you would see good volume and open interest right till 2019-20.

That's rather a sweeping statement. While I agree that it is normally very good advice, and a retail trader would probably be foolish to say take a speculative position on Jan 2018 NG that doesn't mean they should only trade high liquidity contracts.

Sometimes when liquidity is low, opportunities arise that wouldn't arise in more liquid markets. Admittedly this normally involves entering into spreads, which people may be less comfortable, and may involve holding positions for weeks, but none the less there can be some good risk reward trades in less liquid markets.

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 crito 
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Article at this site may be interesting:
U.S. Energy Information Administration (EIA)


And if you look at these charts (top two mainly)
Natural Gas Prices: Long Term Forecast to 2020 | Data and Charts - knoema.com

You see that us NG is cheap (I assume though cheap shale gas) so with US starting export of LNG at least the various NG markets will move together meaning usa NG will rise.
meaning it would not be a bad idea to buy a far out NG future (altough even if it moved from 4 to 6 that is only $20,000 in a 2, 3 or 4 years... but it could be interesting, or perhaps better write a (naked) put 4.0 ;-)


@SMCJB
Do you know if for CL there was a simular exceptional high spread as there for NG 2006/2007? and if so, roughly around what period?

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 SMCJB 
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crito View Post
@SMCJB
Do you know if for CL there was a simular exceptional high spread as there for NG 2006/2007? and if so, roughly around what period?

When you say exceptionally high spread similar to NG 2006/2007 I assume you mean what happened to the summer-winter spreads (V-F and H-J mostly). These spreads were specifically caused by Brain Hunter & Amaranth taking enormous positions that were unsustainable over the long run.

There are probably some examples of similar things happening in crude but I can't think of anything close to that egregious. There was MG's hedging debacle back in the 90's where they caused front month spreads to plumet every month for quiet a while. USO rolling positions also distorted the front month spread considerably for a period of time before they modified their roll (2007?).

One thing to remember, Natural Gas is a domestic (US & Canada) market, effected by domestic fundamentals. While it is possible to import from oversea's, in reality the cost makes it nonviable except in very specific situations. This also has a constraining effect on the size of the market. Crude on the other hand is an extremely large international market. While the NYMEX Light Sweet Crude Futures Contract (referred to as WTI since that's the crude most often delivered into the contract) is a land locked crude, US crude oil prices do have to follow international supply and demand, as we still import vast amounts of crude. Hence US prices have to compete with international prices. What this means is that if you have a price aberration in the US markets, it has a ripple effect into the international markets, and the forces in the international markets are so large they will often dampen that ripple, which in turns dampens the price aberration. Not saying it doesn't happen - just that it's a lot larger market and hence aberrations are a lot more difficult to last.

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 crito 
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I had a look at that Analysis software for seasonal spread trading | SeasonAlgo.com - SA site that was mentioned.
the demo is interesting although you wouldn't have made any money on the Corn spread this year.
may keep an eye out for next year
(they buy the may contract & sell the december around now, hoping for fear)


thanks SMCJB.
its interesting to see that current oil futures are widening. the spread between the CLH14 & CLZ14 is about $7
any idea why that is? or why CL is in backwardation? too many storage tanks?

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 indiantrader 
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@SMCJB

Thanks for detailed explanation about NG. Since you are focusing on energy markets, may be you
could answer some of my queries?

Can you show an example of your NG spread trade?

Have you traded spread between WTI-Brent? The recent last 2 years correlation between the two has been about 61%, would you take that into account ? Do you trade WTI on CME or ICE when spreading with brent? Do you get cross exchange margin credit when trading on CME and ICE?

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 SMCJB 
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crito View Post
thanks SMCJB.
its interesting to see that current oil futures are widening. the spread between the CLH14 & CLZ14 is about $7
any idea why that is? or why CL is in backwardation? too many storage tanks?

Sorry cant help you there. I find crude a very difficult market compared to trade compared with NG.


indiantrader View Post
@SMCJB
Have you traded spread between WTI-Brent? The recent last 2 years correlation between the two has been about 61%, would you take that into account ? Do you trade WTI on CME or ICE when spreading with brent? Do you get cross exchange margin credit when trading on CME and ICE?

I do not currently trade Brent-WTI but have done previously.

Brent or Brent Blend crude is a North Sea crude that is loaded by ship in Scotland. In reality the Brent program has dropped off so much in recent years that when people refer to Brent, they actually mean a North-Sea basket of crudes that includes Brent but also crudes like Forties. Brent is the crude that most Euro/Russian/African and many Middle Eastern crudes are benchmarked against. Hence in reality it's a far more important bench mark than WTI. North Sea and West African crudes are the swing barrel and go west (USAC USGC) or East (India, Far East etc) depending on price netbacks.

WTI (well technically Light Sweet Crude) is a US based Crude Oil contract based upon Light Sweet Crude (almost exclusively WTI - hence the name) delivered to Cushing OK. For decades the US was a very large crude importer and had to first import crude and then transport crude from the Gulf Coast up into OK. Hence crude prices on the Gulf Coast ("GC") had to price themselves high enough versus international prices to attract barrels, and crude prices in OK priced themselves at a premium to even the GC. This is why when you look at historical Brent-WTI prices, WTI traded at a $1-$1.50 premium to Brent.

With the large shift in US & Canadian oil production fundamentals have changed dramatically. While the US still import significant quantities of crude we now have more crude in the midwest and OK than we need. Hence WTI prices now trade at a (sometimes significant) discount to GC prices, and the historical relationships to brent no longer apply. WTI became a land locked crude whose fundamentals were no longer tightly correlated to international fundamentals and prices. More recently the US has reversed some of the pipelines that used to transport crude from the GC to OK and the price relationship has converged again.


indiantrader View Post
@SMCJB
Do you trade WTI on CME or ICE when spreading with brent? Do you get cross exchange margin credit when trading on CME and ICE?

You definitely DO NOT get cross exchange margin credit with CME and ICE.

You can trade Brent-WTI on one exchange though and get significant exchange margin credit,. CME has a copy-cat Brent contract and ICE have a WTI contract. Liquidity on ICE's WTI contract is a lot higher than CMEs Brent contract though.

Also maybe more importantly. ICE list a Brent-WTI exchange spread, where you can trade the spread without any leg risk. If you trade the spread in this way you get futures in the underlying contract and not on the spread itself. Details of ICE's Brent-WTI spread can be found here

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 crito 
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perhaps this helps
https://www.theice.com/publicdocs/futures/ICE_Monthly_Oil_Report.pdf

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indiantrader View Post
Sure the 2,3 and 5 years notes are more affected by the taper decision. The only advantage of 10-30 spread is higher trading range and higher liquidity.
Since the yields on short -term treasuries are expected to decrease, the yield curve is expected to lower on the short end which will raise the curve as a whole. All these are just presumptions and actual trades will be taken only on confirmation on price action and a technical model.

@indiantrader .. From Jan 1 to May 1 2013, the yield curve from short to long term was basically unchanged. Yet, from May 1 to today, has changed dramatically. The 5s have really exploded, but the 2s and shorter have been held in check. So this has been a steeper curve -- yet, over the same period the long end, as measured by 10s and 30s, has actually flattened. My point is that the curve "as a whole" (as you said) is not uniform and that a rise in the 10 year, which is expected, does not imply a proportional rise (and greater, you hope, if you are in a 10/30 steepener) in the 30 year. So the long end may flatten, as it has the latter half of 2013, while at the same time the shorter end has steepened. Again, in other words, the liquidity of the instrument has no bearing on a decision of whether to trade a 10/30 vs a 2/10 or 5/30, as the flattening/steepening of the curve is not uniform across term structure.

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 indiantrader 
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@josh

Thanks for detailed reply.

My whole point was related to the taper decision in december and its likely effect on yields and treasury prices and not for last 6 months.

Which contracts are affected by the taper/rate decision? Let me quote from Peter Navarro, prof of economics-- " The short term treasuries are affected by the discretionary rate decisions by fed and long term treasuries are affected by the inflationary expectations".

Lets compare the yield curve on 1 st dec 2013 and 1 st jan 2014 to see 18 th dec taper decision. One can see the pronounced effect on 5 and 10 yr notes, however 30 yr bond yield is little affected. The yields on 5 and 10 year notes are lower almost equally and those on 30 year bonds are lower very minimally. Since price is inversely proportional to yields, my idea was about going long on NOB spread.

The higher liquidity and higher trading range I mentioned was about the exchange-traded spreads and not outrights and in this aspect I see NOB more favourable.

Here are the yield curves for last 1 mth and last 6 mths for comparison.


Something about curve shapes from Navarro.
The curve has steepened in last 6 months which is indicative of good economic recovery.
If the long and short ends move down leaving a hump in middle, then that could be beginning of a regression.
A flat/inverted curve means economic regression

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indiantrader View Post
Lets compare the yield curve on 1 st dec 2013 and 1 st jan 2014 to see 18 th dec taper decision. One can see the pronounced effect on 5 and 10 yr notes, however 30 yr bond yield is little affected. The yields on 5 and 10 year notes are lower almost equally and those on 30 year bonds are lower very minimally. Since price is inversely proportional to yields, my idea was about going long on NOB spread.

Yields on 5s, 10s, and 30s are higher from Dec 1 to Dec 31, not lower. From your own chart, you can see that 5 year yields increased from 1.37 to 1.74 (37 bps), 10 years went from 2.75 to 3.00 (25 bps), whereas the 30 year rose from 3.82 to 3.94 (only 12 bps). Thus the 5-30 and 10-30 curves have both flattened.

If you buy the NOB spread, as you say, and calculate the ratios correctly, you are betting on a steepening of the 10-30 curve, which has flattened in December (and for the entire 2013 year). Most are expecting continued rising yield on the 10 year, most are thinking between 3.25 and 3.60 or so for 2014. And since rate hikes will probably not occur until late 2014 (maybe August-Sept earliest?), it is likely that the 2-10 curve will probably steepen. But why are you expecting 30 year yields to rise so drastically? We are in a relatively low inflation environment, nowhere near 2% target, so why would 30 year yields rise so much? Maybe it will, I just don't see it. Maybe it will flatten, maybe it will steepen. But regardless of that, my point is that you are talking about a Fed-based play, yet the NOB is not really an appropriate spread for that, at least as far as I can figure--you have not explained why it is anyway--you keep talking about short term rates, but the NOB spread does not involve short term rates.

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 crito 
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hi guys,

to get back to that spread i mentioned before: sell NGH14 buy NGJ14
i closed it today.
Guess it was a very lucky trade (well you need that sometimse ;-)
sold at $2700 and bough back this morning at $700
i did not expect it to come down so fast, thought it would take till feb to get it down...

perhaps wait a while if the spread get again above $2500 to ride it again ;-)

happy new year with good trades.


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crito View Post
i did not expect it to come down so fast, thought it would take till feb to get it down...
perhaps wait a while if the spread get again above $2500 to ride it again ;-)

Market did drop 20c/MMBtu on Tuesday... back up 9c today, so you may get a chance to do it again.

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 crito 
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SMCJB View Post
Market did drop 20c/MMBtu on Tuesday... back up 9c today, so you may get a chance to do it again.

if it happens again, i guess i'll wait till i see it bend down again over the top this time
i still think the chances it will expire with a difference between $500 to $1000 (between the contracts) are higher than some guys playing the market... but i'll look at the historical years this weekend...

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 tigertrader 
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@josh: Gross is bullish on the front end of the curve, because the taper announcement combined with a drop in IOER could turn out to be very bullish for the bond market. And, this would persist until the Fed actually raises the funds rate, which wouldn't be until JY sees 6.5% unemployment and 2.0% inflation.

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crito View Post
hi,

I'm looking for spread traders to share ideas with.
i have been trading futures and future optinos for many years and am now looking into (future) spread trading.
i can find only a few threads about spreads so hopefully there are some people out there...

you can either reply on this therad or send me an inmail.

to make it a bit more concrete, i have been looking at the following spread:
sell NGH14 buy NGJ14
comment welcome,

have a good Xmas!

newbie to spreads here. I never really go to thinking about them much as late until i looked at SeasonalAlgo and saw NGM14-NGQ14 spread and it got me thinking. I was wondering if this could be done with options as well?

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 crito 
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hi,

Here the NGh-NGj spreads of the last 9 years, and except 2009 all others ended negative (top left is current and still positive).
Even the 2006 year ended negative.
All curves are downwards
although the NG market changed a lot last few years, i guess there is a fair chance that if it gets high enough again it can be a nice ride down again.

@Nomad4x, i'm new to spreads too, and like you have the feeling money can be made. would love to share experiances to learn. Does seasonAlgo has stacked charts? so eg. the same contracts (or spreads) of various years on top of each other?


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 MeanBean 
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Where to learn to spread trade? Can anybody recommend resources to learn spread trading? Not looking for "guru" but simple resource that explains the mechanics. thanks.

the meanest bean of all,
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 nomad4x 
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crito View Post
hi,

Here the NGh-NGj spreads of the last 9 years, and except 2009 all others ended negative (top left is current and still positive).
Even the 2006 year ended negative.
All curves are downwards
although the NG market changed a lot last few years, i guess there is a fair chance that if it gets high enough again it can be a nice ride down again.

@Nomad4x, i'm new to spreads too, and like you have the feeling money can be made. would love to share experiances to learn. Does seasonAlgo has stacked charts? so eg. the same contracts (or spreads) of various years on top of each other?


Not that I'm aware of, however, if you have 50 twitter followers and do a tweet advertising Tweet about us and get full access for 14 days | SeasonAlgo.com - SA they will give you a 14 day trial. I was looking at this for my selling options and stumbled across your thread and thought this sort of fits in to selling options in a round about way. I get seasonal data in TNT Live, however, it is somewhat cumbersome and not logical.

I'll post here when I know a bit more about stacking charts. This should be a fun journey!

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 walker 
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MeanBean View Post
Where to learn to spread trade? Can anybody recommend resources to learn spread trading? Not looking for "guru" but simple resource that explains the mechanics. thanks.

This site has some basic info to help you get started: What is Spread Trading?

Joe Ross also has a book "Trading Spreads And Seasonals", you may be able to find a pdf version somewhere like scribd.com.

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 crito 
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nomad4x View Post
newbie to spreads here. I never really go to thinking about them much as late until i looked at SeasonalAlgo and saw NGM14-NGQ14 spread and it got me thinking. I was wondering if this could be done with options as well?

Do you mean buying or selling? (or buy one /sell other?)
Point is that with a spread, both contracts can go up but if one goes up faster the spread either goes up or down.
So if the spread goes up you don't know what the 2 future do.


what i like about spreads is that you have a complete different instrument (low correlation with others), also it (often) doesn't move as fast as the futures (so can be traded with smaller accounts or used to open more different spreads to diversify for the same money) and i have the idea they move more gradually (not as erratic/high vola as the futs)
and obviously the margin is lower but the gains too.

@MeanBean,
MRCI MRCI Products seasonal spread strategies and trading strategies for futures traders has some spreads & seasonal but I never made any money with those (when I had a membership)
Point is (in my opinion) they look back 5 or 10 years see that if you traded between date X and date Y you would have had 90% winners and made $$$. But if you have enough data you always find those periods and in statistics 5 or 10 samples is really nothing (which seems to be correct, seen their bad performing portfolio, once again when i was there a few years ago).
So either I’m not doing it right (using their info that is) or…

The basics are pretty simple, you buy one contract and sell the other and I’m a strong believer that you can learn a lot form books but nobody is going to tell you how to make $$$ (in that case they didn’t write the book but used their own system).
Happy to share experiences with you, in a quest to finding a profitable way of trading spreads.

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 crito 
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MeanBean View Post
Where to learn to spread trade? Can anybody recommend resources to learn spread trading? Not looking for "guru" but simple resource that explains the mechanics. thanks.

here is a 90 minute youtube video, nice intro
Seasonal Futures Spread Trading at the ICE
Seasonal Futures Spread Trading at the ICE - YouTube

You can skip the first 6 minutes.
if you find any better out there, let us know.

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@crito,

You are doing mentions wrong. Simply type @Username, like @Big Mike or @crito. Nothing more.

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 crito 
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In the mentioned youtube video, Turner shows that there is more volume in spreads than in the futures can that be true? Or only for very popular spreads?
Second, does anybody know how to enter the (ice?) exchange spreads in to IB (interactive brokers trader workstation)?
So far I simply created a spread in IB myself but it would be interesting to look at the exchange spread for better charting.
Perhaps have to activate some (ice) data provider?

@Big Mike, I’ll give it a try sometimes it does come up as a link sometimes it doesn't...

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 crito 
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In my attempt to learn to trade spreads, I had another look at the NG spread (NGh – NGj) and the comments in the Turner video.
It makes sense to get a feeling what can happen (high & lows) to look at previous years (the moore research charts Turner used).
So I downloaded (via pinnacle) the historical future contracts, wrote some software to create my own spreads & chart (I like a bit more flexibility).

Below the chart. I took the time period 1-jan till 1-march for the years 1991 till 2014 (so this is no continues contract only a short timespan(2month) of each year and then ‘glued’ together. Those vertical lines up do not exist but happen because i only look from 1/1.
Since its now early January and it will close 2th half feb, it makes no sense to me to look outside that timeframe.
It gives you the bandwidth what can be expected to come...



The two extremes are 2001 & 2003
To be more exact early jan 2001 & end feb 2003
So good to know that this spread can reach $2 ($20,000) and if you trade it as a bear spread you better wait till it is really moving down hill

I than had a look at the NG report SMCJB was so kind to share and I downloaded the historical inventory data.
I set that out in a spreadsheet (added more years, from 2000 so 2001 & 2003 are in there)
Below the NG storage charts.
And it now makes sence why 2001 & 2003 had such a big spread.
As you can see 2001 already started low so that is why the spread was so high from early jan.
And 2003 reached the lowest point of those 14 years so that makes sense too.
Looking at this chart, at Dec for year 2013, we currently have an average year so I doubt that this will give us those huge spreads.




I guess the next step will be to look where the spread ended around 15th of feb for those years and at what minimum level to get in to have a change on a nice ride down.
Current spread is at 0.131

Comments on how to trade this welcome,

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 crito 
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hi,

I found a newsletter where a spread is discussed. Date was 18 dec 2013 so still somewhat recent.
I'm interested in what you think and if you would trade it?

Details in screenshot.



it seems he purely looks at the current spread in combination with the average of the past few years (the purple line), so the seasonal. Assuming that on average, the spread should go up. so no indicators, simply get in around 18th of dec and get out 18 feb.

I had a look at the past 5 years, see screenshot below, top left is current, rest older years.
First notice day is 24 feb so you need to get out before that.

Personally i can't see a clear seasonal pattern but looking forward to your replies.
Big point (1) for cotton is $500




If you blindly entered at 18 th of December and close at 16 feb (without stops), all trades would have been winners. (for those past 5 years).
Biggest drawdown’s would have been 2013 ($925) and 2009 ($475)
Profits where, $695, $1295, $5265, $45, $465
So if we ignore the big winner, on average $625 (and when you are lucky a lot more).
If you set your stop loss at $600 or $900 you would have had 80% winners (2013 would have stopped you out)
So you risk would roughly be the same as the avg. gain but you have a high chance of success.
Could be interesting…

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 tigertrader 
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josh View Post
Yields on 5s, 10s, and 30s are higher from Dec 1 to Dec 31, not lower. From your own chart, you can see that 5 year yields increased from 1.37 to 1.74 (37 bps), 10 years went from 2.75 to 3.00 (25 bps), whereas the 30 year rose from 3.82 to 3.94 (only 12 bps). Thus the 5-30 and 10-30 curves have both flattened.

If you buy the NOB spread, as you say, and calculate the ratios correctly, you are betting on a steepening of the 10-30 curve, which has flattened in December (and for the entire 2013 year). Most are expecting continued rising yield on the 10 year, most are thinking between 3.25 and 3.60 or so for 2014. And since rate hikes will probably not occur until late 2014 (maybe August-Sept earliest?), it is likely that the 2-10 curve will probably steepen. But why are you expecting 30 year yields to rise so drastically? We are in a relatively low inflation environment, nowhere near 2% target, so why would 30 year yields rise so much? Maybe it will, I just don't see it. Maybe it will flatten, maybe it will steepen. But regardless of that, my point is that you are talking about a Fed-based play, yet the NOB is not really an appropriate spread for that, at least as far as I can figure--you have not explained why it is anyway--you keep talking about short term rates, but the NOB spread does not involve short term rates.

@josh: BTW, the NOB (10/30) flattened 15 basis points from 129-114 since the taper announcement and the TUF (2/5) steepened 20 basis points from 73-93 since the taper announcement. So, you were spot on in your reasoning.

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  #47 (permalink)
 zikonc 
san ramon
 
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Where do we go from here?

Following some reading about the market seasonality I decided to chart annual market performance since 1980 based on how well January traded.

I scored January 3 times. If 1st 5 trading days were positive then January scored 1, if the last five days were positive then January scored 3 and if the entire month traded positive then January scored 5. For example, Jan.2013 scored 9.





Based on the data above I am thinking we may get around 5% return this year. What is everyone's sentiment for 2014?

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 crito 
amsterdam
 
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zikonc View Post
Where do we go from here?

What is everyone's sentiment for 2014?

Hi Zikonic,

I'm not a big trader on es (i assume this is sp500?) so i would guess as long as there is fed stimulation the sp goes up when they stop it slows and most likely will go down.

i had a quick look at the sp future but can't find any spread trade there, no seasonals, no big differences between current contract and eg. 1 year further. i guess it has to do with the fact that there is no fear for harvest or stock/transport etc..

If you look at the up and down years for es (?) do you get the same results for nasdaq and russel? or are there years where es is up but nasd is down, etc?
Would be interesting to see if your predications will come true...

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 crito 
amsterdam
 
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hi,

I got an email (free newsletter) from Craig Turner (guy from mentioned youtube video) regarding a possible spread trade.
see screenshot below.
I haven't looked into it yet will do later,

ps: the mentioned usda report will be published tomorrow.


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 crito 
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Hi KubaK & others,

Thanks for your input and info, appreciated!

Interesting you prefer to ride the seasonal up. In my little study so far I have a small preference for riding the spread back to the norm so to say. So eg. when something happened that created the front month to rise relative to the back month I prefer to wait till it is moving back to the back month. That way I have plenty of time to enter and know what to expect (roughly) on max profit. I guess it may have to do with my preference to sell naked options.
But perhaps you can change my mind ;-)

Here is a sample I opened 7 jan. its (again NG)
I sold NGk14 and bought NGk15 so I sold the “NGK14-NGK15”
I think the ‘we-run-out-of-NG’ is creating a fear premium but we have reach a top so I hope to ride the fear mountain down back to the norm(al).
Perhaps I’m too soon but time will tell.
And May NG is after the NG switch GH months. As you can see most previous years where downwards.
Today another NG storage update, can be interesting, will have huge draw from inventory but wit warmer weather comming up NG already moved a few % down last 2 days, we'll see...

And I agree we need to create some standard in front month vs back month, buy what sell what since it can be very confusing.

Looking forward to any trades you like to share, new or historical.
And hope you don’t mind if I pick your brain now and then. (feedback/your thoughts on the ngk14-ngk15 appreciated)
So far (very limited) I’m quite enthusiastic on trading future spreads.



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 crito 
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@KubaK

Did you do any coffee trades last year?

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 crito 
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KubaK View Post
Yesterday I bought one contract of HGN14-HGH14 (Copper july-march). This year's price has fallen down as it also did in 2011, 2006 and 1995. Those years started recovering with the beggining of january and so it seems this year might too. It is most similiar to year 2011. My entry was after the pattern 1-2-3 low and I don't want to see the price fall down below the low. If it did, I would trigger the exit button :-) Profit target is open but mainly I would like to exit at circa 2 or 2 days before FND, we'll see what will be quicker.

I had a quick look at your copper spread.
hope you don't mind me crunching some numbers.

the low was at 31 dec, -0,023 (x25000 big point value) = $-575
during july-oct it was pretty flat around +0,01722 (x25000) = $+414

not sure where you entered but let me guess, after the dip, so around $-400 (??)
so your risk is $175 (lets round it to $200) and your profit target is about $800
that is a nice ratio (1:4)

do you have any fundamental data, or more info on what caused the spread drop?
you mentioned 1995,2006 & 2011, i haven't looked at previous years yet but the only concern I have is what happened in those other years? But I guess that can be looked up.

Regards.

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KubaK
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Hey folks,

I am sorry for that "toho much of SeasonAlgo" post. I was wondering myself when I was submitting it if it wasn't too much :-D Apparently it was. Nevermind, it was caused by my enthusiasm about this great service.

As I wrote in that post, I don't have much time nowadays so I can't join the discussion properly. But as soon I'll have some free time I'll be here.

Just quickly: When analyzing that HG spread I picked up those specific years because those are ones which felt down the same way this year did. And they started recovering with the beggining of new year. So I speculate the same could happen this year. I entered at -1.4 with stoploss below the low and PT at 1.7+ (will see how quick it'll recover).

Successful trades!

Jakub

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MoscowOnHudson
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Hi, everyone! Can someone explain the difference to me between exchange spreads and synthetic? I know exchange spreads offer lower exchange-recognised margins, but, bloody hell, for the sake of me I cannot understand what a synthetic spread is. Is this basically a spread but with no special margins, i.e. a 'fake' spread?

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  #55 (permalink)
 crito 
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Hi, everyone! Can someone explain the difference to me between exchange spreads and synthetic? I know exchange spreads offer lower exchange-recognised margins, but, bloody hell, for the sake of me I cannot understand what a synthetic spread is. Is this basically a spread but with no special margins, i.e. a 'fake' spread?

Hi MoscowOnHudson,

From what i googled (and i agree, very little to find on synthetic spreads) I found that a synthetic spread is something like:

-1 x SPM11 ( Big S&P 500) against 5 x ESM11 ( E mini S&P 500)
-or YM vs. ES

So 2 very similar or supposed to be the same(very high correlated) instruments.
At least that makes the most sense to me.
And I suppose low margin can be offered since the risk of above is low.


The Barchart site has a ‘synthetic spread’ tab but it seem to me simple calander spreads. Link below simply mentions various Corn spreads and the same results are shown under synthetic spreads and future spreads.
Barchart.com - Futures | Spread Quotes | Corn (P)


But from further reading I also get the feeling that the term was never clearly stated and now is used for various more exotic spreading techniques like different/multiple markets and variable ratios.
Eg. here is a BM thread where a synthetic product is discussed (in my opinion a normal spread)


For a definition of Synthetic Futures Contract (not spreads) see:
Synthetic Futures Contract Definition | Investopedia
What is Synthetic Futures Contract? definition and meaning

hopes this helps.

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 josh 
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MoscowOnHudson View Post
Hi, everyone! Can someone explain the difference to me between exchange spreads and synthetic? I know exchange spreads offer lower exchange-recognised margins, but, bloody hell, for the sake of me I cannot understand what a synthetic spread is. Is this basically a spread but with no special margins, i.e. a 'fake' spread?

From your perspective, the customer/trader, an exchange-traded spread involves a single transaction with one product. The CME has defined, for example, an exchange-traded NOB spread. This means that if you want to trade the NOB and you have access to these quotes, then you open up your software, look up a single symbol, and buy and it and sell it like it's any other futures contract. Intrinsic to the exchange-traded spread will be the ratio of the underlying products which are being spread. CME used to have spread quotes on their web site but now charge separately for them.

Synthetic basically means "artificial" or "not natural." Without the use of an exchange-traded spread, if you want to trade a spread such as a NOB, then you have to, on your own, without an exchange-listed single symbol, buy and sell the correct combination of individual products to achieve the spread you want to trade. So instead of buying 1 exchange-listed NOB, you would have to buy 2 ZN and sell 1 ZB. Some trading software can automate the process so that you define your own spread, and trade it just as if it were an exchange spread; but it will still usually incur two separate transactions. If you had a spread with three legs, like the crack, then a synthetic spread will involve 3 transactions, etc, and hence an exchange-traded spread in this case becomes even more attractive.

You can create any synthetic instrument by combining anything you want. For example, you can create a spread and call it "GOOGSOFT" ... buy 1 GOOG and sell 30 MSFT, for a relatively dollar-neutral approach anyway. A synthetic spread is just a way for you to create a spread on your own, if there is no exchange spread available for what you're trying to accomplish.

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 SMCJB 
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MeanBean View Post
Where to learn to spread trade? Can anybody recommend resources to learn spread trading? Not looking for "guru" but simple resource that explains the mechanics. thanks.

I saw A Guide to Spread Trading Futures (ebook) by Rajen Kapadia discussed on this forum somewhere. It's an ebook available several places ( eg Amazon) for about $3! If you really know very little (or nothing) about futures spreads, futures butterflied then this will get you started. It explains poisitioning sizing, spread ratio's etc etc. The writer obviously uses TTs XTrader as many of the screen shots are from that software. It's not going to make you a spread trading expert but for $3 it's decent value.

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 crito 
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SMCJB View Post
I saw A Guide to Spread Trading Futures (ebook) by Rajen Kapadia discussed on this forum somewhere. It's an ebook available several places ( eg Amazon) for about $3! If you really know very little (or nothing) about futures spreads, futures butterflied then this will get you started. It explains poisitioning sizing, spread ratio's etc etc. The writer obviously uses TTs XTrader as many of the screen shots are from that software. It's not going to make you a spread trading expert but for $3 it's decent value.

Thanks SMCJB looks interesting, I like books that are done by traders.
Interesting to see those low cost ebooks/pdf’s pop up more and more.

i found a short youtube book promotion movie done by the author, for those who want more info.
Ebook Overview: A guide to spread trading futures - YouTube

the price i see from amazon is $6.39 but perhaps because I’m in Europe (?)
There is another link next to the video where you can buy the pdf for $4,29
https://payhip.com/b/bNTE

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 crito 
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Here the Andy Jordan/Joe Ross free email i got today with a spread trade setup.
So instead of the normal seasonals he now goes for a (spread) swing trade.
In my personal oppinion a lot of "if's" and "maybe's" but interesting to see how this works out.



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 crito 
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hi,

anybody know this book?
i read somewhere its (partly) about spread trading

What I Learned Losing a Million Dollars
by Jim Paul


What I Learned Losing a Million Dollars (Columbia Business School Publishing): Jim Paul, Brendan Moynihan, Jack Schwager: 9780231164689: Amazon.com: Books

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 crito 
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For those interested, Rajen Kapadia (the spread ebook guy) has a blog here:

Euribortrader.blogspot.com

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 crito 
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For those interested in yield curve spread trades, nob, charts etc
Perhaps this is interesting (see charts menu) & ‘market data’ menu
Curve Trades

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 Physicsman 
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The book I first read when I started spread trading was "The Complete Guide to Spread Trading" by Keith Schap. I found it to be quite good. Unfortunately, it is out of print! On Amazon, sellers are trying to flog it for ridiculous prices.

I guess, if you can find it 2nd hand for a reasonable price then you're in luck. Just something to be on the lookout for.

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 crito 
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Another Andy Jordan free newsletter spread.


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proman
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I have my personal blog about trading calendar spreads: futurespreads.blogspot.com & I'll start a thread here in a few days duplicating posts from my blog.

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 SMCJB 
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proman View Post
I have my personal blog about trading calendar spreads: futurespreads.blogspot.com & I'll start a thread here in a few days duplicating posts from my blog.

What do the charts with 1, 3, 5 & 10 show?

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PropArb
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I've always been a bit gunshy about "seasonals" ever since the WSJ published an expose on the dismal record that Jake Bernstein's book on seasonals showed. This was a long time ago. Seems too easy and obvious to me.

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proman
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SMCJB View Post
What do the charts with 1, 3, 5 & 10 show?

Averaged prices for 1, 3, 5 and 10 years.

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Kurtas
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Hi,

I got email from SeasonAlgo (analytical software for futures spread traders) and they provide full free access for 1month - they celebrate 1st anniversary.
Use this link, sign up or sign in and then you will get automaticly full access.

PS: Link is valid only till March

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brentf
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Experienced commodity trader (30 years) looking to collaborate with objective of incorporating spread strategies into alogrythims. Please pm if interested. thanks.

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