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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,207
Mathematically Pascals Triangle is coefficients in the expansion of any binomial expression. Each number is the sum of the numbers above it.
But in trading lingo...
Top Row - 1 - Your trading outrights
Second Row - 1 1 - Trading spreads. Long one instrument and Short another.
Third Row - 1 2 1 - Trading Butterflys (or Spreads of Spreads). eg Long 1 CLG3, Short 2 CLH3, Long 1 CLJ3
Fourth Row - 1 3 3 1 - Trading Double Flys (or Butterfly Spreads, or Spreads of Spreads of Spreads). eg Long 1 CLG3, Short 3 CLH3, Long 3 CLJ3, Short 1 CLK3
Fifth Row - 1 4 6 4 1 - Trading Flys of Flys! eg Long 1 CLG3, Short 4 CLH3, Long 6 CLJ3, Short 4 CLK3, Long 1 CLM3
The lower down the triangle you go, the lower the volatility and at least for my strategies also the greater stationarity of the price series.
Several markets (Crude, Natural Gas, Eurodollars, SOFR to name 4 I have traded) actually have exchange listed Butterfly spreads (1-2-1). In fact crude has 1,3,6 & 12 month exchange listed Butterflies (eg they actually have a CLZ3-CLZ4-CLZ5 Buttefly). Eurodollars even have Butterfly Bundles so instead of being 1-2-1 in individual months its 1-2-1 in Bundles. So for example 1x M3+U3+Z3+H4 vs -2x M4+U4+Z4+H5 vs +1x M5+U5+Z5+H6. Eurodollar's also have exchange listed Double Flys! Seriously! And yes I actually have one strategy that I have traded for about 6 six years now that is 1-4-6-4-1 'Fly of Flys' Strategy that I think has been profitable every year I've traded it.
So while I agree with @BA 21 that this are some of the easiest ways to get very high probability setups, the reality is they are difficult to understand for newbee's and additionally, from a trading perspective, the more legs you have in a strategy, the greater the importance execution becomes which is something that more retail focused platforms are not very good at.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,207
While I clearly am on the same page as you with this I'm not sure I agree with your characterization of (at least all) conders. We would agree that if I have an ABC butterfly on its generally non-directional/mean reverting. Ditto the BCD Butterfly. But if I buy both the ABC and BCD Butterfly, I have the AB-CD condor. Does the combination of two non-directional/mean reverting butterflies yield a directional condor? And for people scratching your heads here, if I buy an ABC Butterfly, 2x BCD Butterflys and a CDE Butterfly, I've actually bought the ACE Butterfly! The combinations become endless!
I am not quite sure. When I was mentored by the Spread Professor, he mentioned that Futures condors are not mean-reverting. I never questioned his comment to determine if that was true, because when we looked at it on the chart, it had some directionality to it. I always assumed that anything not adhering to Pascal's triangle wasn't mean-reverting.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,207
Ahh yes the 'Spread Professor'. He'd be a good addition to futures.io. He'd get treated a lot better here than he does over at that other toxic trading site he is on. Ex-NYMEX local I believe. Met a couple of people who have been through his course and they speak highly of it. From what I've seen of it he knows what he is talking about (and trades in a similar fashion to me). Think he clears (or at least did) Advantage as well.
Regarding the Condor's, it depends what the condor is. In my ABC+BCD = AB-CD Condor, I think that's a pretty balanced condor. But if your condor is CL Mar23-Apr23 vs CL Mar24-Apr24 then yes I would agree that is a very directional trade.
BA 21 and SMCJB
You guys have piqued my interest on this subject.
I’ve been trading straight mini contracts directionally. Would be nice to look at another form of trading.
Where would you suggest I go to learn more about spread trading and the types you guys have been discussing, and how to trade them.
Go to TastyTrade's site. Their education is free, but it is very disjointed.
You want to search for the series by Pete Mulmat called Splash into Futures. He had a really good series back in 2015 on spread trading futures. They upload most of their videos to YouTube. On either site (Tasty's official site, or their YouTube page), search for futures spreads and you will find every video addressing futures spreads/calendar spreads.
As a newbie, I was immediately exposed to spread trading by way of Jonathan Rose's Bond Bootcampfutures trading course. From there, I knew I wanted to spread trade. So, I dug deeper and found other resources.
Further, the six-month algo trading course I attended also covered spread trading albeit it was under a different name, statistical arbitrage (StatArb) trading.
In StatArb trading, you are calculating cointegration to determine if a spread (1-1) is mean-reverting or not. If you remember my previous comment about a 1-to-1 spread occasionally going directional, well, the calculation of cointegration will keep you out of a spread that is going directional. It's not enough for two contracts to be correlated, they also must exhibit cointegration.
Persistence! Nothing in the world can take the place of persistence.
Talent will not ... nothing is more common than unsuccessful men with talent.
Genius will not ... Unrewarded genius is almost a proverb.
Education will not ... The world is full of educated derelicts.
Persistence and determination alone are omnipotent! Calvin Coolidge
