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Since a few weeks i am looking in to bond spreads and butterfly spreads to hopefully increase my profitability.
So far i find it very interesting but i keep struggling with the correct multiplier.
To be clear, i am trading ZN and ZB, not the spreads, i watch the spreads to get my entry's more accurate.
So here is the first question, what is the best spread to watch when i want to trade ZN or ZB?
Is it 3-1 ZN-ZB or is it 1-1 ZN-ZB. Or 3-2 ZF-ZN or 1-1 ZN-ZF?
Second question is what multipliers should i use to make butterfly spreads?
It looks like a lot of the information i am finding online is only making it more complicated since i see different multipliers/spreads.
Can you help answer these questions from other members on NexusFi?
It changes as the duration of the underlying bonds change. (As yield rises, duration shortens). The CME periodically updates the "standard ratios" on its site. You aren't required to use these proportions, but they will give you the maximum margin credit.
I will have to do some more research, however i think for my trading style it is better to use the standard proportions provided by CME since i do not trade the spread, i just monitor it.
What about butterfly spreads? What is the correct way to put a butterfly spread on the chart?
One way i saw was ZB+ZN-UB, ZB should be the focus here since this will be the instrument i will be trading with that butterfly. So the ZN butterfly then should be ZN+ZF-ZB, right? Do i need to use multipliers for butterfly's?
So, if you have one standard spread as 3x-y, and another is 2y-z, and you want to construct a butterfly x-2y+z, then you basically combine the two legs:
(3x-y) - (2y-z) = 3x+y+z (note you are subtracting a negative value for the middle term, hence the positive number!)
This looks like it could be correct.
However when i make a ZF, ZN, ZB butterfly it goes the exact opposite way all the time? It looks like i am missing something or is this normal?
The way you set it up looks correct. I'm not sure what you mean by "going the other way." You can go really deep with yield curve spreads, and I'm quickly getting out of my depth, lol. The CME website has a lot of great free resources to help you.
You can also Google "NOB spread trading" and you'll get a lot of result too. NOB stands for "notes over bonds."
Watching spreads using the indicator I posted in the downloads section, I've found the NOB and FYT to be the most useful. I haven't looked at butterfly spreads, but maybe I should. I've found several instances where the order flow simply doesn't match up with the spreads. In fact, I've seen a few days now where the cumulative delta of the NOB seems to be the opposite of the direction it goes. Perhaps it is other spreads that are being more influential, perhaps I'm calculating it wrong, or perhaps spreads aren't being very influential on price right now.
