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Achieve market neutrality for NQ and ES
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Achieve market neutrality for NQ and ES

  #1 (permalink)
Elite Member
baltimore marylnd
 
Futures Experience: Beginner
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Posts: 69 since May 2013
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Achieve market neutrality for NQ and ES

Hi,

What is the correct # of contracts I need to buy/sell NQ if I am long/short ES, so that my gains/losses in ES/NQ are offset by gains/losses of the other instrument.

For example; if i am long ES. How many contracts do I have to be short NQ. So that my losses in ES/NQ are offset by gains in ES/NQ?

I was currently using 2 contracts of NQ to offset the movement of 1 contract of ES. Since 1 tick of NQ = 5 and 1 tick of ES = 12.5.

So two contracts of NQ = 10$ movement
VS
1 contract of ES = 12.5$

The difference is only 2.5$. Which I can deal with. But the issue with this method is that NQ tends to move a lot more on average than ES. And my gains/losses in ES are not offsetting my gains/losses in NQ.

Thanks

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  #3 (permalink)
Elite Member
Austin, TX
 
Futures Experience: Master
Platform: ninjatrader, r-trader
Favorite Futures: CL, NG, TF, NQ, YM, GC, ES
 
liquidcci's Avatar
 
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To perfectly offset they would have to essentially move in exact parity which they do not. Even then as you mentioned there is a $2.5 dollar gap. Might be better if you lay out what you are trying to accomplish or detail out your strategy and thinking process. I bet someone here can give you some ideas that might be helpful.


calhawk01 View Post
Hi,

What is the correct # of contracts I need to buy/sell NQ if I am long/short ES, so that my gains/losses in ES/NQ are offset by gains/losses of the other instrument.

For example; if i am long ES. How many contracts do I have to be short NQ. So that my losses in ES/NQ are offset by gains in ES/NQ?

I was currently using 2 contracts of NQ to offset the movement of 1 contract of ES. Since 1 tick of NQ = 5 and 1 tick of ES = 12.5.

So two contracts of NQ = 10$ movement
VS
1 contract of ES = 12.5$

The difference is only 2.5$. Which I can deal with. But the issue with this method is that NQ tends to move a lot more on average than ES. And my gains/losses in ES are not offsetting my gains/losses in NQ.

Thanks


"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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  #4 (permalink)
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Answer
This post has been selected as an answer to the original posters question Answer

Here's a link that talks about this:

https://www.tastytrade.com/tt/shows/market-measures/episodes/sizing-futures-pairs-01-12-2015?locale=en-US

Below the video to the right where it says RESOURCES, click on that to see the slides. Here are slides 8, 9 & 10:

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  #5 (permalink)
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liquidcci's Avatar
 
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If you are looking for delta neutral type strategies I would look into options. I have done it with options but never with futures so I am not really qualified to comment on trying to do it on futures. Although I will say trying to be market neutral can get very complicated and takes a great deal of experience to make money. It is more like a chess game. Like any other trading you can also lose money at it. I have found trading directional is better especially in the futures market.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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  #6 (permalink)
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baltimore marylnd
 
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rmejia View Post
Here's a link that talks about this:

https://www.tastytrade.com/tt/shows/market-measures/episodes/sizing-futures-pairs-01-12-2015?locale=en-US

Below the video to the right where it says RESOURCES, click on that to see the slides. Here are slides 8, 9 & 10:

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THANK YOU! that is exactly what I was looking for.

IV ratio of 1 to 1 on ES and NQ makes sense.

Here is what I came up with earlier;

ATR(14) of ES = 27.61; # of ticks in this range = 110.44
ATR(14) of NQ = 66.59; # of ticks in this range = 266.36

ES = Value per contract of this range in ticks = $1380.5
NQ= Value per contract of this range in ticks = $1331.8

What i'm working on is a spread strategy. Previously I had been using 2 contracts of NQ and 1 contract of ES. The thought behind that was that if 1 tick of NQ = 5$; then to make that equal.. tick by tick.. i'd have to buy two contracts. Since ES 1 tick is $12.5. But the issue I was seeing is that NQ tends to move a lot more than ES.

Thanks guys!

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  #7 (permalink)
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If I were doing this I would look at trying to do some kind of regression over historical data to find the optimal hedge ratio. You can obviously do any type of regression you want, but it would be future to future. Using IV is probably not the best here for two reasons. First if you are looking at options that expire on different months than your future, you are going to have distortions due to the different time horizons. Next is that IV is directionless and not directly measurable. So even if there is any additional perceived volatility in the market it will affect the IV, no matter up or down. However your notional value will either grow or shrink depending on if the move was up or down. This adds some additional complexity if you want to be able to have balanced results for both upwards volatility growth or downwards in regards to price shifts.

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