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CanOz

CanOz

Home runs feel good, but base hits pay bills!
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I've been wanting to start a thread on spread trading for a while now. Its something that the Prop guys i know keep telling me to get into, as well as being something new to learn:). I've got a few books, thanks to Boofis and Rajen Kapadia.

Will post anything regarding the spreads here.
 
That's a great idea CanOz. This is one area that I am not really well read about. Are you talking about futures spreads here or equities (pairs trading) or options etc?
 
payday said:
That's a great idea CanOz. This is one area that I am not really well read about. Are you talking about futures spreads here or equities (pairs trading) or options etc?
Click to expand...

I'm ok with anything posted here on spreads Payday, but i was specifically thinking of spreads on futures contracts. The pairs thread cover equities quite well.

I'll also mention Rajen's book again and will post of few of things i learn out of the book on here.
 

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Spreading is something I'd like to learn a lot more about too.

Something that I would look into before spreading is the exchange rules. Given that spreading usually requires a position sizing which is a lot bigger to make profit from smaller movements (and in theory less risk), If an exchange can break one side of the trade can leave you in trouble (or rich).

Edited: article found so took out my explanation...

- - - Updated - - -

http://www.smh.com.au/business/sfe-sued-for-1m-over-cancelled-trades-20091011-gsd4.html

"By cancelling just one part of their trade, the traders claim the SFE annulled their insurance policy on the first trade which remained in play, leaving them exposed to losses. The traders say they lost a combined $861,150, on the 10 spread trades on interest rate movements"
 
havaiana said:
A few years ago there was an article in one of the aussie papers about a fat finger or something which caused an unusually large movement in the bonds. As per the exchange rules they ruled to break all of the trades that were made past %. This left some Spreaders with only one side of their spread on whhich happened to be the losing side. So they were stuck with a massive losing outright position as the profitable side of the spread was broken. In the article they were suing the asx, not sure what the outcome was, will keep looking for it

- - - Updated - - -

http://www.smh.com.au/business/sfe-sued-for-1m-over-cancelled-trades-20091011-gsd4.html

"By cancelling just one part of their trade, the traders claim the SFE annulled their insurance policy on the first trade which remained in play, leaving them exposed to losses. The traders say they lost a combined $861,150, on the 10 spread trades on interest rate movements"
Click to expand...

These guys were part of a Prop Firm, a US one i believe. We were just talking about this the other day. We were having dinner with a Prop trader from Australia and he was talking about the old times. He mentioned that these guys got cut out of one leg and they lost a million, or at least that's what i think he said happened. They lost the lawsuit, packed up and went back overseas.

Kind of ironic seeing how spread trading is normally considered less risky than out-rights.
 
Fair chance the spread would have been in profit too. Imagine the split second your thoughts change from what colour car you will buy to what you will say to the risk manager...
 
CanOz said:
These guys were part of a Prop Firm, a US one i believe. We were just talking about this the other day. We were having dinner with a Prop trader from Australia and he was talking about the old times. He mentioned that these guys got cut out of one leg and they lost a million, or at least that's what i think he said happened. They lost the lawsuit, packed up and went back overseas.
Click to expand...

The case was dismissed with the SFE's costs to be paid by the traders. Here's the case ruling if you've got an hour or two to spare:

http://www.austlii.edu.au/au/cases/cth/FCA/2010/534.html

THE COURT ORDERS THAT:

1. The application be dismissed with costs.
Click to expand...
 
Thanks for that Captain...

Whats the bet they changed their procedures after the ruling too...
 
I'm also very interested to listen to anything you wish to share. Boofis directed me to an e-book which I've got printed up and have read a little.
 
So there are different types of spreads involving futures, i always just thought it was trading two highly correlated instruments like bonds, or energies. Indeed many trade Calendar spreads as well.

Calendar spreads are buying and selling of the same security with different maturities or delivery months. Spreads can range from 1 month up to ten months...this was surprising for me. the closer the months, generally the better the correlations. So this might be long one month and short the next month contract...

Butterfly spreads are where you spread two calendar spreads together....so you might be long 1, short -2, long 1 in three different months....Rajen really does a better job of explaining this than me.

There are also condor spreads...see pic

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havaiana said:
I've found all the stuff on spreading is either extremely basic or extremely quant heavy like this:

http://www.amazon.com/Trading-STIR-Futures-Introduction-Short-Term/dp/1897597819

That's probably the main reason it's a good area to look into, because there is suck a lack of quality info out there

Some stuff here too:
http://guybower.com/
Click to expand...

Thats why Rajen wrote the book, for that very reason. I'm just replying to an email to him, maybe he can drop in and add to the thread. Seems like a real good fellow.
 

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Hi guys,
My name is Rajen,
Been trading spread for around 6 years now. Alot of the talk is about the FED tapering and if they do, we could continue to get a steepening of the Yield curve in the US and Europe pushing Bond spreads up.
Feel free to ask any questions regarding spreads or the ebook
 
r4jen said:
Hi guys,
My name is Rajen,
Been trading spread for around 6 years now. Alot of the talk is about the FED tapering and if they do, we could continue to get a steepening of the Yield curve in the US and Europe pushing Bond spreads up.
Feel free to ask any questions regarding spreads or the ebook
Click to expand...

Hi Rajen

I have just stumbled across your youtube channel, very glad to have you here



Do you mind if I ask you a bit about your market experience/background?
 
Last edited by a moderator:
Basically I started trading in 2006, doing the TED spread which is Euribor against Shatz(2 year gov bond). Then moved myself to interest rate spreads and now do a bit of everything.
I took the plunge straight after Uni doing this so, have had my ups and downs, but its been able to provide me with a living so in that case its worked out OK.

I had a setback in 2011 when my funds were with MFglobal and as you may know they went bankrupt and i lost a sizable chunk of it, which im still waiting to to maybe recoup. Either way had to start over after that, and got back to where I was so now hopefully a good end to the year from here on.
 
r4jen said:
Basically I started trading in 2006, doing the TED spread which is Euribor against Shatz(2 year gov bond). Then moved myself to interest rate spreads and now do a bit of everything.
I took the plunge straight after Uni doing this so, have had my ups and downs, but its been able to provide me with a living so in that case its worked out OK.
Click to expand...

Hi Rajen,

Do you mind sharing some stats on your spread trading? E.g. Win%, avg win/avg loss, hold duration, trade frequency, transaction cost as percent of PnL etc?

How many potential pairs do you watch, and how many pairs would you be spreading at any one time?

I am also interested in how you determine position size and what criteria you have for stops...

By way of background I trade equity pairs on the ASX but know absolute nothing about spreading bonds/futures. I guess I am asking the questions above to see if I can steal any of your insights and apply it in the equity space. There's a pairs trading thread on this forum with my posts sprinkled over it... so if you have time I hope there might be something useful for you there as well.

https://www.aussiestockforums.com/forums/showthread.php?t=14508&page=48

r4jen said:
I had a setback in 2011 when my funds were with MFglobal and as you may know they went bankrupt and i lost a sizable chunk of it, which im still waiting to to maybe recoup. Either way had to start over after that, and got back to where I was so now hopefully a good end to the year from here on.
Click to expand...

Good to hear you are bouncing back. I was in a similar situation but was fortunate to have most of my money out the day before it collapsed. But the unfortunate thing was that I was holding a very large renounceable rights arbitrage trade - which means I couldn't close my position and take all the capital out...

The whole bankruptcy process has been a joke - trading is hard enough without counterparty risks.
 
skc, i'm only on page 20 of the thread so maybe this question is answered after that but...

Have you ever done a test to compare the profitability of just taking an outright position in the stock that has moved away from the mean to see if it is more profitable than trading it in a pair?

I know there are more things to consider than just the profit, but I'm just interested, because in theory it seems that pairs trading could be used by outright traders to find outright trades
 
Another question skc/r4jen

Have you found that mean revision spreading/pairs trading has or is becoming less profitable over time?

It seems to me like a type of style that could be 'easier' to automate in comparison with other styles
 
havaiana said:
Have you ever done a test to compare the profitability of just taking an outright position in the stock that has moved away from the mean to see if it is more profitable than trading it in a pair?

I know there are more things to consider than just the profit, but I'm just interested, because in theory it seems that pairs trading could be used by outright traders to find outright trades
Click to expand...

A mean reversion strategy on outright share may be completely valid, but you wouldn't trigger it based on divergence away from the mean of a pair's ratio. If you are simply looking at divergence from mean with the stock itself - then really that's just trading off Bollingar bands or moving average etc. Otherwise you can trade a stock divergence from a sector's mean. But without hedging the resulting equity curve would be very different I'd imagine.

On odd occasions I do use signals from pairs trading to take outright trades, but the position sizing, stop placement etc will be completely different.

Anyway, if you have questions on equity pairs probably best to ask them on the pairs trading thread to keep it all together.

havaiana said:
Another question skc/r4jen

Have you found that mean revision spreading/pairs trading has or is becoming less profitable over time?

It seems to me like a type of style that could be 'easier' to automate in comparison with other styles
Click to expand...

Falling profitability - not really. And if there's any fall in profitability it's due to reduced volatility (compared to say 2009-2011) rather than equity pairs being a crowded trade. Automating equity pairs can certainly be done but there's a lot of discretion in my own trading that's probably not programmable.

I do however have the same question wrt spreading bonds. It seems like a simple thing to program... (showing my ignorance)
 

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