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Spread / Pairs Trading - the allure and the reality
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Spread / Pairs Trading - the allure and the reality

  #31 (permalink)
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addchild View Post
@TheDude , His Dudeness, duder, El duderino,

You always have the greatest links, thanks for that. In your trading, how are you dealing with seasonality? are you taking advantage of it?, trying to avoid it? ignoring it?

Thats a good question.

It really depends.

I use MRCI for seasonality data - but there are other suppliers too. I tend to see if the current market is behaving according to the last 5 years - which I find more reliable than the 15 year pattern. I look for a period when the 5 year shows good acceleration.

If the market is going the opposite way, and there is some news story to suggest why - such as the drought causing shortages in corn last year, then I'll take that and override any seasonal pattern.

There are other spreads I'll take based on mispricings in the curve. OK Fat Tails suggests the RBOB is in fact a seasonal issue. It never came up in the MRCI seasonal report, but that doesnt mean they get every seasonal pattern - maybe in the last 15 years, the trade never did much?


If spreads interest you, you want to look at MRCI IMO. a subscription is pretty reasonable value IMO. Im pretty sure they offer a trial. You want the MRCI Online subscription, not the weekly report.

Heres a link to their results - assuming you took every trade mechanically - which in fairness they dont advise doing. The spreads way outperform outrights.

http://www.mrci.com/results/2012results/

Quite a few of their monthly spread trades are in fact FX 'spreads'. I dont like these as to my thinking USD-BP - USD - Yen is really a Yen-BP outright! You also dont get any or very little margin relief. Their Treasury spreads are also assumed to be ratioed at 1-1 so again you wont get margin relief - like I say, its reseach, not adivory. You need to decide which trades suit you. Some people here will love their FX spreads if they have an FX account and just trade the cross rather than a futures 'spread'


Last edited by TheDude; September 20th, 2013 at 05:07 AM.
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  #32 (permalink)
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TheDude View Post
As for RBOB:

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(edit: kevin answered this below but leaving the original here for posterity)

I hate to beat this dead horse, but I don't get the same spread that you do here. Just a sanity check--are you plotting the ratio of H4 to J4, or is there a tradeable calendar spread from CME that you are showing here? I could not find any such product in my search but I may have missed it. I generated the chart below using minute-to-minute RBH4 and RBJ4 data. I'm also not sure what the histogram at the bottom of the chart is showing--too low to be volume for either contract in question.

This being said, I just don't see the same mismatch as I see on your chart. While it's true that there is a large difference between H4 and J4, as the charts show and as the web site you pointed out shows, from what I can see from a visual inspection, as well as the numbers, the difference and ratio has stayed pretty close. From a day-to-day basis, based on the data here, it looks to me as though the difference between the two has stayed in a pretty tight range.

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Last edited by josh; September 20th, 2013 at 05:11 PM.
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  #33 (permalink)
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@TheDude thanks again,

For a long while now I've wanted to play around with calender spreads, more specifically trying to build a portfolio of them. Seems now is a good a time as any. I'm probably going to run it in sim through the rest of the year and then Ill put some capital behind it.

I've lined up about 5 different trades going into the end of the year, but I was a little excited to get started so today I put on a short /ZSX13-/ZSQ14 @64'4

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I Just plan on holding this (!SIM!) until I roll into different trades at the start of october.

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  #34 (permalink)
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josh View Post
I hate to beat this dead horse, but I don't get the same spread that you do here. Just a sanity check--are you plotting the ratio of H4 to J4, or is there a tradeable calendar spread from CME that you are showing here? I could not find any such product in my search but I may have missed it. I generated the chart below using minute-to-minute RBH4 and RBJ4 data. I'm also not sure what the histogram at the bottom of the chart is showing--too low to be volume for either contract in question.

This being said, I just don't see the same mismatch as I see on your chart. While it's true that there is a large difference between H4 and J4, as the charts show and as the web site you pointed out shows, from what I can see from a visual inspection, as well as the numbers, the difference and ratio has stayed pretty close. From a day-to-day basis, based on the data here, it looks to me as though the difference between the two has stayed in a pretty tight range.

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Josh -

I am confident that you cannot rely on 1 minute data for RBH14 and RBJ14 to give you an accurate chart (maybe if you used bid/ask prices, not last traded price, you might be OK). You have all kinds of spurious spikes - prices that were never attainable. Below is the exchange traded spread feed, which differs greatly from the chart you show.

If you are using RBH14 and RBJ14 to construct your chart, the only prices I'd believe in are the settlement prices.

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  #35 (permalink)
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Here's the individual data charts, with 5 minute bars. You can see that trading is infrequent for both products.

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  #36 (permalink)
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kevinkdog View Post
Below is the exchange traded spread feed, which differs greatly from the chart you show.

Beautiful, that's exactly what I am looking for. This is CME, and is it a tradable product, or just a synthetic that must be legged into? What data feed is it you are plotting? (and which software as well? looks nice). For IQFeed I see some crack spreads but I do not see an H14-J14 spread for RBOB.

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  #37 (permalink)
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josh View Post
Beautiful, that's exactly what I am looking for. This is CME, and is it a tradable product, or just a synthetic that must be legged into? What data feed is it you are plotting? (and which software as well? looks nice). For IQFeed I see some crack spreads but I do not see an H14-J14 spread for RBOB.

It is an exchange traded spread, so you can definitely trade it. There is almost always decent bid/ask in these spreads.. My chart is from the Tradestation Futures 4.0 platform, which allows you to trade exchange spreads. Ironically, Tradestation's main platform does NOT allow charting or trading of exchange spreads - pretty frustrating.

I'd check with the IQ guys, maybe they have the exchange spread available.

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  #38 (permalink)
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kevinkdog View Post
It is an exchange traded spread, so you can definitely trade it. There is almost always decent bid/ask in these spreads.. My chart is from the Tradestation Futures 4.0 platform, which allows you to trade exchange spreads. Ironically, Tradestation's main platform does NOT allow charting or trading of exchange spreads - pretty frustrating.

I'd check with the IQ guys, maybe they have the exchange spread available.

Excellent--I'm assuming the exchange is CME. I'm curious as to which broker would provide a tradeable spread (other than Tradestation) like this. I bet CTS would, but I'm not currently using their platform.

This thread has turned out to be very informative, thanks to all the folks who are contributing--please keep it coming guys, I feel like I'm starting all over (in a good way) learning this stuff.

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  #39 (permalink)
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josh View Post
Excellent--I'm assuming the exchange is CME. I'm curious as to which broker would provide a tradeable spread (other than Tradestation) like this. I bet CTS would, but I'm not currently using their platform.

This thread has turned out to be very informative, thanks to all the folks who are contributing--please keep it coming guys, I feel like I'm starting all over (in a good way) learning this stuff.

CME - yes. Most brokers offer these, I'm guessing. I traded them with 4 or 5 different brokers over the past few years.

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  #40 (permalink)
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There are a lot of good points that have been raised here; not the least of which is the comment from @vegasfoster "i've never found anything meaningful that would justify the costs". Any strategy that mitigates risk, is going to mitigate profit, also. There is always a price to pay, and the market is always going to extract a risk premium. If you aren't trading exchange traded spreads and executing the spread outright, you are going to have 2X the slippage and 2X the vig, on top of the risk premium you are paying. In the pit, at least, you got the edge on the least liquid or deferred contract, and attempted to get the edge in the front, and either leg the spread on the bid, or a tick better. You also had a rather sizable bid to lean on in the spread paper. And in addition, commissions were not an issue. During roll, I would routinely have 2000 calendar spreads on in the 30 year that I would take home overnight. In contrast, my hands would be shaking when I carded up a 50 lot outright in the bonds. That should give you an idea about the difference in volatility between spreads and outrights. Once again, there's a price to pay for the reduction in volatility.

However, @TheDude does bring up some very valid points in reference to term structure and spread relationships, although I would like to see some empirical evidence that supports his claim that spreads are more persistent than outrights. Nevertheless, spreads do present actionable mispricings, and can often provide valuable information that is a precursor to market turns and even regime changes. On a longer timeframe, spreads can reflect fundamental differences in supply and demand, but in shorter timeframes, variances in spreads are more of a flow-oriented phenomenon, not a value- oriented one. Which is the reason why legs in the same spread can be positively correlated and negatively correlated intraday. And, as is in the case with outrights, flow can trump fundamentals for longer than the average leveraged trader can tolerate.

Bottom line is, I have no less than a dozen spread charts on my workspace, all of which I consider invaluable. They are an inherent component of my methodology, yet I do not consider myself a spread trader. I may initiate spreads when they get out of whack, in a mean reversion strategy, but more often than not, I will leg out of one side of the spread into an outright position. Obviously, spreads are scalable and you can trade size, and there are times when both legs may be profitable when trading a reversion strategy, but in the strictest sense of spread trading, you're trading the spread differential, which is generally less volatile, and one side is going to be outperforming the other. Pragmatically speaking (especially in an electronic venue), you get more bang-for-your- buck trading outrights.


Last edited by tigertrader; September 20th, 2013 at 09:09 PM.
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