Spread Trading Stock Index Futures

[jfutures 10]

Hi there,

 

I was wondering if anyone could point me in the right direction of how to effectively spread trade stock indexes, specifically es, nq & ym.

 

So for example if I wanted to go long 1,2 or 3 contract ES, how many contracts of YM or NQ would be best to go short to effectively hedge my position?? What other combinations provide good spreads in your trading experiences for trading YM and NQ also??

 

Im by nature risk averse therefore I like to trade conservatively and look to make consistent modest gains over time, therefore spread trading is the best route for me. I have found spread trading treasuries quite straight forward in terms of trading 2/5 years, 5/10 years & 10/30 year combos, however spreading stocks is unclear to me.

 

Replies would be much appreciated.

 

Thanks.

[fishing 10]

jfutures

 

the idea is to be dollar neutral

 

so let's say you want to sell ES and buy YM

 

ES trading 900, so 1 ES pt is worth 900 * 12.5 * 4 = 45000

YM trading 8500, so 1 YM pt is worth 8500 * 5 = 42500

 

the ration would be 45000/42500 or 1.06

 

so you can hedge 1YM for 1ES or 17YM for 16ES

[jfutures 10]

Thank you very much Fishing.

 

This really is excellent information and will prove to be most useful.

 

Thanks again.

[fishing 10]

no problem jfutures

 

i would love to hear how you are going to trade it..

[jfutures 10]

To be honest, I'm still experimenting.

 

I have a strategy based on assessing futures and cash markets whilst combining market profile and swings on different timeframes in order to identify potential opportunities. Knowing how to spread trade stock indexes is essentially to enable me to reduce my risk as & when the opportunities appear, because I don't like to make outright single directional plays in the underlying futures.

 

I guess I'm trying to identify how stock indexes move in terms of value per tick. With treasuries its clear that e.g. 10 year has more value per tick than the 5 year (I should really say more price movement in 10 year compared to 5 year generally) so a short spread trade would be short one 10 year and long one 5 year if you believe 10 year will decline. With stocks, it seems 'generally' speaking, whatever your bias may be for e.g. ES, it would be best to spread ES/YM or YM/NQ combos according to the rules mentioned in your post (which I will be testing when I get some time).

 

What methods do you employ if you don't mind me asking Fishing and which markets do you trade??

[fishing 10]

is spreading treasuries very competitive or is there room for retail traders?

 

i've been trading outright futures and used to take quite big hits occassionally (still trying to be discipline and minimize them)

 

that's why i'm very interested in spreading. i've been looking at ES/YM because of high correlation between the two and convenient hedging ratio (nearly 1 by 1). From what i observed, the spread is kind of correlated to ES on intra-day and daily charts, generally.

 

quite often it goes only 1 way without looking back on intraday charts, so that's quite a challenge for me.

 

other than that, i've been trying to find some documents for this trade for quite a long time but so far no luck...

[jfutures 10]

I'm not sure I entirely understand the question Fishing, would you mind clarifying please?? In treasuries, spread trading would simply be longing 1 and shorting 1 pretty much instantaneously (i.e. hitting market orders in both markets at the same time) in order to get yourself in. If you get the direction right, then the longer bond out of the 2 should start to show you profit at some point (whilst the other bond showing a loss which would be less than the profit on the longer bond). I was hoping this would be the case with the ES/YM spread, hence my original post. It looks fine, but then again I'm going through the tesing stage at the mo.

 

Actually I started to use spread trading strategies because I too used to take big hits on many occasions because of doing single futures directional trades. I have found that spread trading really does reduce my risk, but naturally it can reduce your profit per trade on a single contract basis but I'm fine with this, I'm more concerned with making modest consistent gains over time.

 

I'm afraid I have no docs on the subject otherwise I would have been happy to forward them to you.

[momentom 10]

You may want to look at spreading the YM against the FESTX50 future (the Dow50 in Europe). There is one margin issue that the YM is 24 hour market while the FESTX50 trades for 14 hours so you need to watch any overnights.

 

Try creating a single chart of the spread and then doing your analysis on that as if it was a single instrument.

 

Lots of opportunity but needs a lot of homework.

[BlowFish 10]

Actually spread betting could negate the need of trading spreads. You can simply reduce your risk by betting a small amount. Pick an instrument with suitable volatility for your purposes and then bet a size that fulfils your requirements for potential loss or gain. Still kind of interested to see how you can wring juice out of two highly correlated instruments. Also won't transaction costs be pretty high? (as the spread isn't going to move as much larger positions will be requires). As an aside have you considered calendar spreads?

[jfutures 10]

That's a valid point Blowfish. In fact, I've tried to locate a decent online execution only broker that provides spread betting on treasuries (with the option of doing stock indexes also) but haven't had much luck as yet. Would you be able to recommend any???

 

When you say calendar spreads, are you referring to intramarket contract spreading?? (i.e. newer contract to older contract). Can you please give some advice on the subject?? Would really appreciate it if so.

 

To spread effectively over time, yes you would need a large account in order to leverage your positions. Comms can be manageable, as long as you are prepared to use a low cost execution-only service.

 

The best way I've found to wring out the juice would be to try to identify which bond for treasuries, or which market in stocks (NB still investigating stocks at time of writing) is setup to move 'the most' in your direction. This trade qualification may be based on a number of things, say trend lines, channeling, OS/OB, market profile, or whatever tools you can find to identify the setup. Then once you trade the spread, assuming you're correct, the trade can show profit. The key (and this is the real key) is to not overtrade, but rather concentrate on picking the cherries, even if they occur 4 or 5 times a month, which is the number of trades I place on average in a month.

 

For anyone interested in spreading treasuries, I found a good article here which sums it up: -

 

Current Issue

[BlowFish 10]

To be honest I don't know an awful lot about spreads. A calendar spread would indeed be buying the front month and selling one further out (or vice versa). It tends to be used on commodities for fundamental reasons (which I don't profess to understand!)

 

Joe Ross has a book "trading spreads and seasonals" his books are quite expensive but he tends to tell it how it is. One of these days I'll get round to reading it and then might be able to give some more helpful answers.

[coval 10]

Hi guys,

 

actually it is my first post on this forum, but as I can see you are talking here about something what I have been doing for around a year and I would be happy to exchange some ideas about spread trading.

I usually trade DAX vs CAC as well as some forex instruments.

 

So far, to trade in such way I have always measured correlation of the securities, to make sure that there is a chance to have the spread closed up....

 

Recently I have learnt that much more reliable method would be to calculate cointegration of the instruments, because 2 charts might be almost perfectly correlated but keep constantly getting away one from another - at least when you measure correlation with Pearson's method...

 

Than, another very important issue comes - when to take a position - the easiest way to answer is: " when the spread is higher than usually". For this I created a very simple indicator which shifts me CAC chart on DAX chart with one point taken as a mutual neutral point, i.e. Jan 1. And than you can see a nice spread between instruments.

Unfortunately, we never know whether we took a really "neutral" neutral point or was it in reality an extreme point and we need to wait months before the spread would come back and let make us earn some money...

 

If this is interesting to anyone please let me know so I will post in some pictures to show clearly the problem...

 

greetings,

 

CoVal

[kannondo 10]

Coval can you post your picture? I am interested to see what you are talking about.