Why isn't the NQ-ES spread tracking the percentage difference between NQ and ES? - futures io
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Why isn't the NQ-ES spread tracking the percentage difference between NQ and ES?


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Why isn't the NQ-ES spread tracking the percentage difference between NQ and ES?

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  #1 (permalink)
alphagamma
London, UK
 
 
Posts: 7 since Oct 2021
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If I want to track the difference between the NQ and the ES futures on a percentage basis, I can type in NQ and add ES on top of it to see when the two futures are far apart. Is there a synthetic futures formula that would allow me to track the spread between NQ and ES in a systematic fashion?

I tried to use NQ-ES but this leads to some confusing, at least to me, results:



As you can see, the 2 (ES orange, NQ magenta) futures and the NQ-ES spread (blue line) start out at 0% but, even though the ES and NQ drift apart and meet once again, as indicated by the green circles, the blue line (the spread), doesn't fall back to the 0% line as it should, because the gap between NQ and ES is closed at the green circled spots.

Why isn't the NQ-ES spread at 0% once NQ and ES meet and above zero (in case NQ gets stronger than ES) and below zero (in case NQ gets weaker than ES)?

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  #2 (permalink)
 bobwest 
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What platform?

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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  #3 (permalink)
alphagamma
London, UK
 
 
Posts: 7 since Oct 2021
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bobwest View Post
What platform?

Bob.

The picture is from tradingview, but the same graphs are displayed by thinkorswim, which leads me to believe that there's a fundamnetal misconception that I have about the percentage view of futures spreads, but I just can't put my finger on what exactly is wrong with my point of view.

Let's say we're at the starting point where everything's at zeri percent.

Next, we encounter a state where NQ went down 3% (is now at -3% in the percentage view) and ES went up 2%.

We see that NQ is undervalued compared to ES, and we want to buy the NQ-ES spread, which should be at -5%, since that spread is long NQ (-3%) and short ES (-2%) which equals -5% total on the whole position.

Buying the NQ-ES spread means that I'm buying NQ and selling ES.

Let's now assume that NQ goes up 3% and ES falls down 2%, then both tickers are at zero percent, andthe NQ-ES spread should also reach zero percent, as the spread neutralized the-5% when I bought the spread.

Unfortunately, the spread doesn't work that way, it's not tracking the percentage difference between the two futures, and I don't know what it does exactly at this point...

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  #4 (permalink)
 qsceszwasdx 
Taipei Taiwan
 
Experience: Intermediate
Platform: Sierra Chart/Multicharts
Broker: AMP(Futures)IB(Stock)
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alphagamma View Post
Why isn't the NQ-ES spread at 0% once NQ and ES meet and above zero (in case NQ gets stronger than ES) and below zero (in case NQ gets weaker than ES)?

I guess volatility of two instruments are different cause this.

Volatility of NQ is much more than ES, that is why above zero NQ gets stronger than ES, below zero NQ gets weaker than ES.

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  #5 (permalink)
alphagamma
London, UK
 
 
Posts: 7 since Oct 2021
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qsceszwasdx View Post
I guess volatility of two instruments are different cause this.

Volatility of NQ is much more than ES, that is why above zero NQ gets stronger than ES, below zero NQ gets weaker than ES.

I don't understand.... Isn't volatility captured by percentages? I'm not looking at ticks, just the pure percentage moves themselves.

If I'm long NQ and short ES, I should capture the percentage moves of NQ and the percentage moves of ES with that spread because i'm long 1 NQ contract and short 1 ES contract...

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  #6 (permalink)
 josh 
Legendary Market Wizard
Georgia, US
 
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You are misunderstanding a few things. To cut to the chase, you need to divide, not subtract, if you want to see the percent difference. Enter your formula on TV as: NQ1! / ES1!

Imagine A is at 100 and B is at 200. Each gains 100 points, with A now at 200 and B now at 300. A has increased 100%, and B has increased 50%. They've both moved 100 points higher, but A has outperformed B on a percentage basis. So of course, since NQ's point value is 3x that of ES, if they both gain 1000 points a difference spread will show no change, but in reality ES has outperformed NQ by a factor of 3.

If you'd bought 1 unit of A at 100 and sold at 200, you'd have made +100. If you had bought 1 unit of B at 200 and sold at 300, you'd have also made +100. Yet, it took twice as much capital outlay when buying B.

When you set the scale to "percent", it takes the leftmost point on the chart, sets that as the starting value, and bases all other values on the chart as the difference from that value, in percentage terms. If you do some experimenting, you will see that this yields the result you want. For example, using Dec 31 as the starting point, you will see a starting NQ/ES ratio of 3.43, and that ratio was almost identical on Sept 2, and the chart correctly shows a near zero percent difference on that day.


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  #7 (permalink)
 tr8er 
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Yep, as Josh said, your charts shows nothing as the percentage change (from the start on the left side) from every instrument, nothing else

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  #8 (permalink)
alphagamma
London, UK
 
 
Posts: 7 since Oct 2021
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Dude, Josh!!! That's a slam dunk!

Your explanation makes it easy to understand. Don't know why I didn't think of that appraoch myself...

Dividing really yields the results that I want! Now I understand the logic behind the spread constructs with 2 tickers. What if I add 4 tickers to the equation?

For example, If I want to track the difference between NQ-ES and RTY-YM, what should I enter then? (NQ1!/ES1!)/(RTY1!/YM1!)? Is that correct?

So buying that spread (NQ1!/ES1!)/(RTY1!/YM1!) results in being long NQ-ES and being short RTY-YM?

What about 3 tickers: 2*ES-YM-NQ?

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  #9 (permalink)
 josh 
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alphagamma View Post
What if I add 4 tickers to the equation?
For example, If I want to track the difference between NQ-ES and RTY-YM, what should I enter then? (NQ1!/ES1!)/(RTY1!/YM1!)? Is that correct?
So buying that spread (NQ1!/ES1!)/(RTY1!/YM1!) results in being long NQ-ES and being short RTY-YM?
What about 3 tickers: 2*ES-YM-NQ?



Easy there tiger... you are looking at percent differences, and you haven't considered notional values.

I'm going to suggest you look at the following:

https://www.cmegroup.com/education/whitepapers/stock-index-spread-opportunities.html
https://www.cmegroup.com/trading/equity-index/files/SP500_DJIA_Spreads_Final.pdf
https://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html

First get the notional equivalency part, and then maybe come back to more than two symbols.

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  #10 (permalink)
alphagamma
London, UK
 
 
Posts: 7 since Oct 2021
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josh View Post

Easy there tiger... you are looking at percent differences, and you haven't considered notional values.

I'm going to suggest you look at the following:

First get the notional equivalency part, and then maybe come back to more than two symbols.

Damn!! I knew I shouldn't celebrate too early.. in comes notional equivalency with the body slam... off the top rope...

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