@sysot1t You mentioned that some FCMs won't accept non-exchange traded spreads such as Velocity. Which brokers other than IB (not a huge fan) would let you build your own spreads (mostly interested in EOD type stuff)?
I get credit (margin wise) from crossland, and that can also be done with advantage... what it comes down to is the FCM has to recognize the position... what I ended up doing with crossland is that I have an account only for that, and I dont do anything else other than that in there...
btw, I think if you were a "pro" Velocity would do it.. after all, I see guys trading power and options on the LB and those products are not even offered to their retail clientele... so I imagine they can, they just rather dont do it for the little guys with under $100K..
Just like trading out-rights, you first have to consider what your trading strategy is going to be. Are you going to be trading with the trend, or are you going to be using a mean reversion strategy. In other words, if you are trading with the trend, you are going to be buying the stronger month and selling the weaker month, or buying the stronger contact, and selling the weaker contract.
In a normal "carrying charge" market, if you are buying the front month and selling the deferred month, you are putting on a bull spread and you are expecting the spread to come in. If you are selling the front month and buying the deferred month, then you are putting on a bear spread, and expecting it to widen. If you are trading with the trend, you will most likely be buying the spread when the market is trending up, and selling the spread, when the market is going lower. If the market pulls back in an up-trending market, and the spread widens, you would want to buy the spread, expecting it to resume it's narrowing trend. Conversely, if the market market was in a downtrend trend, you would look for the spread to narrow on a market pullback, and put on a bear spread, expecting it to widen, when the market resumed it's trend.
In a mean reversion strategy, you are looking for spreads that widen too far or come in too much. In this case you will be fading the spread, instead of trading with the spread; selling the strong leg and buying the weak leg. When a spread comes in too far or gets too cheap, you will want to sell the spread, expecting it to revert back to it’s mean, and when a spread goes out too far, you will want to buy the spread, hoping that it narrows and reverts back to it’s mean.
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pointed out, most platforms, do not provide spread trading functionality. This means you have to leg your spreads on, and you have to leg your spreads off. Most likely, giving up the edge on both legs of the spread when you put it on, and when you take it off. One of the advantages to trading spreads on the floor, was that you could get an edge on at least one leg of the spread if not both. When it came time to cover the spread, you could either leg out of the spread getting the edge on one or both legs, or get out with the edge, against the spread paper. Another consideration, and perhaps the most important, is you are unable to physically place stop orders, so trade management has to be done manually.
In my opinion, the disadvantages to trading spreads makes it less than an optimal strategy, if not a prohibitive one, when done electronically. It is far easier to trade out-rights, and if you put on a spread and it is profitable, then most likely, it would have been more profitable if it had been an outright position.
The one possible exception is trading calendar spreads in the grains, when they are at full carry. Although, it doesn’t happen often, it’s the time when you want load up. Spreads will not trade past the cost of full carry, so you can put on bull spreads, and not have to worry about the spread going out on you.This was an extremely profitable, almost risk free strategy, that I utilized when I was in the bean pit.
Last edited by tigertrader; October 24th, 2011 at 11:19 PM.
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