Day Trading using Calendar Butterflies

[RichieE]

Does anyone here day-trade calendar butterflies? (e.g. on the Bund, Bobl, Schatz) If so, what techniques are you using for your entry and exit signals?

Although a butterfly strips out a lot of the nasty intraday volatility, I'm having trouble finding good entry/exit signals. I have been caught out several times trying to extract a few ticks from a fly oscillating within a fairly well defined trading range. For example, I try to sell at the top of the range only to find that the fly has now established a new trading range, leaving me short!

Any ideas?

 

[insight2]

Sorry, to hijack your thread a bit, I am just curious ...

So, what you are really saying here, that putting a complex spread position is not actually protecting you at all. Just makes you pay more commission and have you worry about getting "legged".

Where is the advantage over the pure directional trade?

cheers, dejan

 

[RichieE]

Sorry, to hijack your thread a bit, I am just curious ...

So, what you are really saying here, that putting a complex spread position is not actually protecting you at all. Just makes you pay more commission and have you worry about getting "legged".

Where is the advantage over the pure directional trade?

cheers, dejan

No - In the case of a calendar related spread position, you are protected from most of the volatility. More specifically it protects you from 'parallel shifts' in the yield curve.

For example, if you are long one 'Mar 08 - Jun 08' spread position in Crude Oil when all off a sudden the March 08 contract moves -100 ticks and June 08 contract moves -100 ticks, your spread position remains completely unchanged from any loss. This is the benefit.

However, you are still exposed to changes in the 'curvature' and 'steepening/shallowing' of the yield curve. Both of these effects will affect the price of one contract 'relative' to the other. So if the the yield curve becomes more shallow causing the Mar 08 contract to rise by +10 ticks and the June 08 contract to rise by only +7 ticks you have a net gain of +3 ticks.

The disadvantage of spread trades is that they cost a lot more since you a trading multiple contracts for a smaller gain.

Does that help explain?

 

[insight2]

However, you are still exposed to changes in the 'curvature' and 'steepening/shallowing' of the yield curve. Both of these effects will affect the price of one contract 'relative' to the other. So if the the yield curve becomes more shallow causing the Mar 08 contract to rise by +10 ticks and the June 08 contract to rise by only +7 ticks you have a net gain of +3 ticks.

...

Does that help explain?

RichieE,

Thanks for explaining.

So one is trading 'yield curve', not the commodities in question. But I guess yield curve doesn't change that often, so intraday trading is out of question?

Does this spread, kind of, oscillate randomly intraday, so one can possibly trade some sort of mean reversal? For example, if just for few seconds, this spread goes to +4, and normally it is around +2, you try to grab buy +4 and sell +2. And all like that, about 20-30 times a day.

cheers, dejan

 

[RichieE]

So one is trading 'yield curve', not the commodities in question. But I guess yield curve doesn't change that often, so intraday trading is out of question?

My mistake... it the 'futures curve' not yield curve (old habits from my days talking about interest rates). You are trading the FUTURES CURVE of the COMMODITY. So in my case I was trading the FRONT END OF THE 'CRUDE OIL FUTURES' CURVE - 'front end' because I was trading the first few months.

Does this spread, kind of, oscillate randomly intraday, so one can possibly trade some sort of mean reversal? For example, if just for few seconds, this spread goes to +4, and normally it is around +2, you try to grab buy +4 and sell +2. And all like that, about 20-30 times a day.

Yes it can, this is one way of scalping. However, be very careful since it can 'break out' to a new level without warning and wipe out your entire days worth of profitable trades.

 

[arabianights]

Why not trade using the outrights or simple calender spreads? To me a butterfly is a belief three prices do not make sense when considered together. Relying upon the prices making sense within the day seems like folly, it has to be a trade for a week or two.

 

[fifty2aces]

Richie - are there any decent books/resources on the internet about this kind of trading? I'm pretty interested in learning about the ways guys in arcades are trading, but most of the reading I've done is about directional trading based on technical analysis.

 

[RichieE]

Why not trade using the outrights or simple calender spreads? To me a butterfly is a belief three prices do not make sense when considered together. Relying upon the prices making sense within the day seems like folly, it has to be a trade for a week or two.

Trading outrights on Oil would be suicidal compared to STIRs. It isn't unusual for the front month WTI or Brent to move +/- 400 ticks in a day. At $10 a tick we're talking about $4,000 on a single contract . Somehow I don't think that the risk manager at Schneiders would have been happy for me to be trading 50-100 contracts!

Simple calendar spreads would be a possibility but this still leaves me exposed to the 'steepening and shallowing' of the futures curve. By using a butterfly I'm stripping out BOTH 'parallel shifts' AND 'steepening/shallowing' of the curve leaving me just exposed to the change in the 'shape' of the curve.

It's all about risk! (Also, from the last time we met, I believe that you have more experience than me so you may have more confidence in pulling it off... )

 

[RichieE]

Richie - are there any decent books/resources on the internet about this kind of trading? I'm pretty interested in learning about the ways guys in arcades are trading, but most of the reading I've done is about directional trading based on technical analysis.

What I've been doing is *NOT* the normal route for arcade trading. 'Arabianights' (who has just posted on this thread) has had exposure to the more 'classical' arcarde career- namely trading STIRs.

If you want to read about what most arcades do then I highly recommend reading the book;

Title: "Trading STIR Futures - An Introduction to Short-Term Interest Rate Futures"
Author: Stephen Aitkin​

It's probably the closest text that I've seen about what goes on in many arcades.

 

[insight2]

Hi RichieE,

Ok, you stripped volatility, but that means that you have four stops to worry about. What happens if one of the stops gets hit and others stay open?

As well, did you think about giving individual legs as inputs to Neural Networks and butterfly differential as output. Just to see if NN can find something there.

cheers, dejan

 

[DC STOXX]

RichieE have u ever considered trading the outfights, with higher risk comes higher reward as well, if you just practice your entry Im sure it cant be that painful to begin with Im sure!.

I have looked at trading all sorts of funky spreads with legs here and there but it just wasn't for me, how do you place your stops with such spreads as well as deciding a trade was worth taking? It all looked random to my simple untrained mind

 

[RichieE]

Ok, you stripped volatility, but that means that you have four stops to worry about. What happens if one of the stops gets hit and others stay open?

You actually have only two stops to worry about since a butterfly can be created from two spreads. These spreads are exchange traded so when you trade one the exchange guarentees that both legs are filled.

As well, did you think about giving individual legs as inputs to Neural Networks and butterfly differential as output. Just to see if NN can find something there.

Interesting idea - an issue that you will find is that an outright has a minimum bid/ask spread of 1 tick, an exchange traded spread will also have a minimum bid/ask of 1 tick and an butterfly will have a minimum of 2 ticks when created as two spreads and 4 ticks if constructed from outrights. Since most people are looking to take a few ticks on a short term basis the bid/ask spread will add a huge amount of noise to the signal.

If you want to work with Neural Nets try working in a hedge fund. Most prop shop training programs will use less complicated technques.

 

[RichieE]

RichieE have u ever considered trading the outfights, with higher risk comes higher reward as well, if you just practice your entry Im sure it cant be that painful to begin with Im sure!

Yes - But you have to have a good overall strategy and barring technical analysis (which I am still investigating), I haven't developed a strategy that doesn't have a good enough risk/reward profile.

I have looked at trading all sorts of funky spreads with legs here and there but it just wasn't for me, how do you place your stops with such spreads as well as deciding a trade was worth taking? It all looked random to my simple untrained mind

There are an amazing 'zoo' of spread strategies out there... butterflies, condors, boxes, pterodactyls and even 'iron' versions ('iron butterflies', 'iron condors'. etc). I'm waiting for an 'asthmatic albatross', 'carbon fibre canary' or an 'inverted bee' strategy to appear . To be honest I'm not sure how many of these are useful.

I do have strategies for entry and exit which I learnt when training with Schneiders, however I was trying to modify them to get more ticks per trade, to cut down my round trip costs and to reduce the downside of any losing trades. I'm sure that, with practice, I could personalise them to better suit my trading style.

 

[fifty2aces]

I do have strategies for entry and exit which I learnt when training with Schneiders, however I was trying to modify them to get more ticks per trade, to cut down my round trip costs and to reduce the downside of any losing trades. I'm sure that, with practice, I could personalise them to better suit my trading style.

I'm assuming you won't want to give away your edge, but do you mind elaborating on the kind of entry+exit strategies you use? From what you said before, I'm guessing they aren't based on TA, so are you mainly reading time+sales and the order book? Or something else?

 

[RichieE]

I'm assuming you won't want to give away your edge, but do you mind elaborating on the kind of entry+exit strategies you use?

The whole reason for me starting the thread was to see what everyone else was doing!

From what you said before, I'm guessing they aren't based on TA, so are you mainly reading time+sales and the order book? Or something else?

I'm looking at a combination of Market Depth (order book), Time & Sales, and trying to pick out when someone is working a large buy/sell order so I can 'pseudo' front run them. I do look at technicals but my knowledge level is basic. I am on of the school that technical analysis is the interpretation of price movements caused by crowd psychology in the non-efficient markets. Therefore I believe that there is merit, but I am still uncertain at the level of effectiveness of some of the more complex signals since they could be swamped by someone trying to work a large order or a shift in sentiment due to a news item.

 

[insight2]

I'm looking at a combination of Market Depth (order book), Time & Sales, and trying to pick out when someone is working a large buy/sell order so I can 'pseudo' front run them.

I personally think that you are looking at right thing. I am looking at the same (book & tape). I tried to follow what happens with the big orders in the book, it worked ok-ish in low volume markets, like Dow Jones 7:00pm GMT, but it fell apart in high volume S&P in the GMT afternoon (US morning). And one wants to trade high volume markets .

Technicals are brought into trading from mathematics and maths is mostly based around things that are continuous. While markets move between states, like liquid, solid, gas in seconds and do not lend themselves to the analysis with tools that assume continuity, like averages, oscillators etc. But, functions are excellent for curve fitting, and one can curve fit even without being aware that he is doing it.

For me it works the best when I imagine that market is actually a person, and I am trying to predict in what mood it is. Just go after little nuances. That totally rocks.

cheers, dejan

 

[fcmisc]

Title: "Trading STIR Futures - An Introduction to Short-Term Interest Rate Futures"
Author: Stephen Aitkin​

It's probably the closest text that I've seen about what goes on in many arcades.

THat's an interesting book. I like the table that tells you what to do over economic releases (e.g. if NFP down, then buy bund!), though i'm always punting the eurostoxx at that time and haven't got round to testing it yet.

 

[TWI]

I find the only time butterflies make sense is when there is a disparity in one spread to another across a period where you may expect the 2 spreads to be about equal but you are nt sure what is out of line. I have used this with success in grains numerous times.
Also talk of more risk with outrights than spreads is only true is the relative position sizing is different for the volatility of the instrument. For example 1 outright may have the same volatility as 10 spreads but 10 spreads will suck away far more of you cahs as commission. I only take a spread over an outright when there is a damn good reason to be in the spread, for example if open interest in one month is much more massive than in another and you know that the volume will have to roll in the near future.

 

[arabianights]

THat's an interesting book. I like the table that tells you what to do over economic releases (e.g. if NFP down, then buy bund!), though i'm always punting the eurostoxx at that time and haven't got round to testing it yet.

I'd rewrite this as "if NFP worse than priced into the bund, then buy bund!".... soooo important.

 

[fcmisc]

I'd rewrite this as "if NFP worse than priced into the bund, then buy bund!".... soooo important.

If you want to get that precise, then just flip a coin and pray.

I normally do NFP wearing a lucky cap.

And my neighbour uses a lucky golden cat.