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Spread Trading, COT, Backwardation/Contango
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Spread Trading, COT, Backwardation/Contango

  #1 (permalink)
 Vendor: www.probabletrades.com 
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Spread Trading, COT, Backwardation/Contango

Does anybody do spread trading on futures? I've traded a lot of options spreads but I'm looking for good info on trading futures spreads, strategies and techniques as futures have different behavior than options.

Also, I'm wondering how/if people use the "curve" or backwardation/contango across the various months to anticipate long-term market direction or perhaps to determine your short-term trading bias.

For example, I'm looking at 3 DOMs on the ES and the prices are

ES 12-09: 1108.50
ES 03-10: 1102.50
ES 06-10: 1090.00

So, you'd never see something like this with options, months farther out at lower price levels, you'd always see higher prices because you're buying more time/premium. However in this example we have futures trading lower each 3mo period out in time. So, could one presume that this means the futures market is pricing in a drop in the market through March and June? So perhaps in my short-term trading I'd be more inclined to look for good shorting opportunities?

Also, does anybody use commitment of traders (COT) data in their trading? For example, if I see more commercial holders long than short then I'd perhaps want to have a long bias in my trading.

I think we (I) focus so much on the technicals in our trading we can ignore the fundamental forces underlying the market.

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  #2 (permalink)
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The lower prices of the 03-10 and 06-10 is because the firms of the SP500 will pay some dividends. The value of this stocks will be lower after this payment, this is mechanic.

But maybe I'm wrong

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  #3 (permalink)
 Vendor: www.probabletrades.com 
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sam028 View Post
The lower prices of the 03-10 and 06-10 is because the firms of the SP500 will pay some dividends. The value of this stocks will be lower after this payment, this is mechanic. But maybe I'm wrong

Perhaps, but I know with commodities you can often get the opposite. Take the end of 2008's oil market. Oil was about $20-$30 but the "back of the board" was pricing oil $60, $70, $80. So what did the big houses do? They bought oil for $20-$30 last year, meanwhile sold the forward months for $70+, took delivery of the oil and stored it in oil tankers until it was time to deliver to whoever ended up holding the contracts they sold, and pocketed the spread, minus their oil storage and delivery costs.

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  #4 (permalink)
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sam is correct, it works the same on currency futures where the forward difference or interest rate differential between the two currencies is priced in.

COT report is useful for long term sentiment, but mostly useless short term due to the delay in release and also the fact that the institutions building huge positions you see on COT report have a much longer time horizon than most traders

If you want to trade futures spreads you should read joe ross 'Trading spreads and seasonals'

also recommend Tom DeMark's book about daytrading options which gives many good options techniques some of which are also applicable to futures spreads

I trade options and futures spreads occasionally when I see a good opportunity in a less liquid market

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  #5 (permalink)
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If your taxonomy for price-based strategies is momentum or relative value, Ninja is strong on the former and weak on the latter. I'm looking forward to better spread/RV tools in NT7 from third parties.

To shodson, I'm new to this but a difference between futures and options is Theta (options) vs Cost of Carry (Futures). On the COT report, the line between speculators and hedgers is pretty blurry despite the CFTCs efforts. GS is a hedger, DB a speculator. Go figure.

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  #6 (permalink)
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Shodson, I note you are interested in spreads but not the idea I put across to you on your journal! It needs a good programmer to be realized, that's all.

As to COT, I just pasted in picture with TS code from an old TS experiment following request for it by Cody on Gio's Idea journal.

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  #7 (permalink)
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cclsys View Post
Shodson, I note you are interested in spreads but not the idea I put across to you on your journal! It needs a good programmer to be realized, that's all.

Hmm, let me look through your comments on my journal again. I'd like to think I'm a pretty good programmer (been doing it for 30yrs). Which post was it that had your idea?


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  #8 (permalink)
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There were a couple of posts a couple of weeks ago, but also a PM.

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  #9 (permalink)
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Tradestation now has COT data built in. I'm still not sure how to use this data though., other than perhaps see where longer-term investors are holding their positions and trade with/against them.

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Spread Trading, COT, Backwardation/Contango-cot.png  
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  #10 (permalink)
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Barry Taylor publishes regular COT indicator on his site for ES traders. Since that is your main market, it seems, you might want to check out his work there. Puts it all together into a SS, and I believe there is also an indicator derived therefrom for TS. I have yet to see that guy put out something that isn't superior. His Better Trin swing-trading system makes steady money, is far better than many highly expensive systems and costs about $50.00 or thereabouts. Last I checked the COT indicator was free.

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