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The Futures spread butterflies should be the lowest risk trades as it hedges the price direction and the spread direction.
I have experience with the Treasury yield curve butterflies at the front, belly and backend of the curve. I have the theory of the flies for CL and NG.
Given that depth of your experience @SMCJB @myrrdin:
What is the reference to read about the spread futures butterflies, book, website, etc.
What is your strategies for trading ? How to analyze, when to enter , when to exit?
Do you have numerical value for margins , I am planning to switch to IBKR and I think they are safest broker for employing flies. I hope we can trade the fly as a single ticket under Globex. I will try to search where CME listed them.
Is there any service that provide butterfly trades in commodities CL, NG, beans, etc ?
Just to add flys can be commission intensive. Also not all flys are implied for example in CL implication is turned on for the first 12 months for certain flys and for few more years only for specific (6 and 12 month June and Dec flys).. for other commodities there are different flys that are implied.. in Grains you will find more of the flys implied.. what this means is u can trade it as 1 ticket without much slippage.. also Not sure IBs take on reduction in margin for these
I think the concepts are identical, so we are open for all strategies that employ futures and its options. We would appreciate your input as well @myrrdin for the Commodity options butterfly strategies.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
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@mosalem2003 unfortunately there are very few Futures Butterfly resources that I know of, and the few that you can find are mostly Eurodollar focused. This is the domain of exchange members (more later) and proprietary trading shops, not retail traders.
Anyway onto an example.
According to CME Core, Margin Requirements are
CL 22J $3600
CL 22J-22K Spread $160
CL 22J-22K-22M Butterfly $81
CL 22K-22M-22N Butterfly $80
CL 22J-22K-22M-22N Double Butterfly $106
(Member rates, non-members will be 110% of this)
So yes Butterflies have super low margin requirements (in some products) and Double Butterflies even lower! I say some products because not all products have similar offsets. For example a Futures Butterfly in say Gold is margined as two spreads. Hence the margin requirement is double that of a spread, unlike in crude where it is half that of a spread. You will notice in this example the double-fly has a further 35% reduction in margin!
Now looking at settlements tonight 4/22/21
J22 57.92
K22 57.61
M22 57.34
N22 57.04
so
J22-K22 spread 0.31
K22-M22 spread 0.27
M22-N22 spread 0.30
and
J22-K22-M22 butterfly 0.04
K22-M22-N22 butterfly -0.03
So looking at those spreads, you could think that the K22-M22 spread is low. So you may want to sell the J22-K22-M22 butterfly at 0.04. If we assume 0.01 in costs, and that you can get out at 0, you would make 0.03 which is $30. Given the margin requirement is $81 thats a 37% return on margin. Alternatively you may want to buy the K22-M22-N22 butterfly at -0.03. If we assume 0.01 in costs, and that you can get out at 0, you would make 0.02 which is $20. Given the margin requirement is $80 thats a 25% return on margin.
Now lets assume you do both, aka the double fly, you sell the JKM and buy the KMN and collect 0.07, pay 0.02 in fees leaving you 0.05, which is $50. Given the margin requirement is $106 thats a 47% return on margin! FYI you may need to hold some of these trades more months, in this case maybe 6+ months. Still nice return on capital.
I know that's a lot of if's, but take a look at the CL JKMN double fly for 2021 and 2020 and 2019.
As @jokertrader said, commissions and exchange fees are intensive. I'm really not sure if you can trade something like this without an exchange seat.
Lets assume you do NOT have a NYMEX seat. Exchange fees are $1.50, NFA fees are $0.02 and lets assume your paying Interactive Brokers $0.85. So that's $2.37 per lot. A Butterfly is 4 lots per trade, or 8 lots per round turn, so $18.96. Makes my '0.01 in costs' above look bad?! Now lets assume you do have NYMEX seat. Exchange fees are now $0.70, NFA fees are $0 and lets assume your paying only $0.25 to your FCM. That's only $0.95 per lot or $7.60 per Butterfly round turn. Now my '0.01 in costs' is high. With a fee structure like this you can trade Butterfly's for 1 tick and still make $2.40!
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,207
I really should add that what I outlined above really is best case scenario, and that execution is as crucial as fees. If you give up a tick in slippage getting in and out that eats a lot of your profit. Hence to really be effective at that trade you really need to be using an Autospreader, which is a software product that can cost $1000/month. Add in the cost of a seat which is $500/month, plus $135 in data fees since your now a professional and your fixed monthly costs are probably close to $2k. If your only trading a 1000 lots a month that adds $2/lot to your fees and makes it uneconomical. But if your trading 10000 lots/month its only 20c, and at 100,000 lots a month it drops to 2c. Of course there are other butterflys that move around a lot more (ie the CL Z1-Z2-Z3 Butterfly) which would make execution and fees much less important. I do think that the JKMN double fly though is a much higher percentage setup than something like the CL Z1-Z2-Z3 Butterfly
One of the seasonal trades working well this year is the RB-HO spread. The actual chart follows the seasonal chart nicely for quite a while.
I had exited the trade using the May contracts in the end of March with a nice profit, and re-entered in the end of last week using the July contracts. On the one hand, the trade has moved rather far this year, and profit potential seems to be limited. On the other hand, vaccinations and the warmer weather in spring should reduce the risk of COVID19, and car drivers should be more active in the net couple of weeks.
This trade is among my long term favorites for many years.
I would guess the fundamentals as in winter time HO rallies and the spread narrows. In summer time, RB demands rallies and HO demand drops, and spread widens?
How much of margin was used and the profit potential? What was the maximum drawdown?
Data for the July spread, which, according to MRCI, should run for about 8 weeks: According to MRCI, average profit since 2006 is approx. $4000, and there were 3 losers since 2006, only one being significantly higher than $1000. Currently, MRCI recommends a protective stop of $3600. If this stop had been used since 2006 it would have been hit 3 times. These figures assume using standard entry and exit data by MRCI. But it is possible to do better.
