FORTS: Strategies and how to implement them - page 11
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When trading calendar spreads, it is important to realise that you are trading a new synthetic instrument whose stationarity has not been proven. Whether the calendar spread of two futures is their cointegrated series is still a big, big question. In a picture, when the spread appears as a narrow strip between two futures, you might get the mistaken impression that it is dancing around zero, or at least has a stationary mathematical expectation, but whether it does in fact is up for debate.
Second and no less important. You need to understand that you need very high leverage to trade spreads, because the spread itself is much less volatile than its futures. The funds going into the GO will be more than for other strategies, even taking into account the 50% discount for such combinations. You may not have enough money for other strategies, and your account will bounce around quite a lot, increasing the effect of changing the contango by tens of times with leverage.
How about a deliverable futures?
There will definitely be a profit, you won't be left without a leg, but you might have to wait a long time.
Aren't you going to trade on the Moscow Exchange via MT5?
I've wanted to for a long time, but I need to find some extra money for my account and I have to go to Moscow.
ln(F1/S)/(T1-t) - ln(F2/S)/(T2-t) ? :)
(F1 and F2 are futures prices, S is the spot price (scaled to account for futures multipliers), T1 and T2 are expiration times)
Anonymus, genuinely surprised. Registration date is 2012. 141 posts, but what an answer. Handsome, just great, kudos, it's been a long time since I've had a formula to think about, and there's a lot to think about and research, more questions than I have answers so far. ...
Think better about how you will trade your logarithms and ratios.
Michael wrote absolutely correctly that the calendar spread is simply the difference between the price of two futures. That's it. There is no need to invent anything else. One sold, the other immediately bought. You can't do that with logarithms and ratios.
The ruble's recent situation was very telling. Its epic decline has ruined no calendar spread enthusiast. At the peak of the fall, by the way, the market interest rate even turned negative:
Let's calculate the interest rate as of 16.12.2014: 78.689 - 80.100 = -1.411(!) roubles or -1.76% for 90 days. Or -7.14% per annum. So.
Let's calculate the interest rate a few days later, on the date of 18.12.2014: 63.331 - 59.511 = 3.82 roubles or 6.41% for 88 days or+26.6% per annum (!). I.e., for two days the ruble interest rate changed from -7.14 to +26.6% per annum! Any calendar spreader at such volatile moments would be blown away.
It is also important to take into account that at such moments the exchange increases the collateral by several times. Taking into account that to secure a position even at normal times requires a large collateral CS, it is clear that at such moments it is impossible to hold a calendar position. The exchange closes them on margin, charging a substantial loss to your account. So think a hundred times before trading calendar spreads.
So think a hundred times before you start trading calendar spreads.
I would even say more, think a hundred times before you start trading on the stock exchange ))
Michael wrote absolutely correctly that the calendar spread is simply the difference between the price of two futures. That's it. There is no need to invent anything else. One sold, the other bought immediately. You can't do that with logarithms and ratios.
On a calendar delta, it is clear... they are derivatives of one and the same instrument, and the prices are not much different.
And if you take different instruments with different order of prices, the difference won't make sense. Example - dollar index futures against the ero/dollar pair etc. imho.
On a calendar delta - understandable ... these are derivatives of the same instrument.
But if you take different instruments with different price order - the difference will not make sense . Example - dollar index futures against the ero/dollar pair etc. imho.
I would even say more, think a hundred times before you start trading on the exchange ))
Think better about how you will trade your logarithms and ratios.
Michael wrote absolutely correctly that the calendar spread is simply the difference between the price of two futures. That's it. There is no need to invent anything else. One sold, the other immediately bought. You can't do that with logarithms and ratios.
I trade futures, but the entry and exit signal is the analysis of the delta built (it is the signal that is given by the delta analysis) I enter and exit. And the rules of delta construction are very important. A simple analogy, the crossing of averages is a signal to buy/sell, but it is not the average (SMA, EMA, etc.) that I buy/sell, but the trading instrument.
And the quality of these signals comes first. The logarithm came about for a reason, it comes from the physics of the process, from a deep understanding of how and what happens in the market.
You can trade a simple difference as well, I'm not against it (and I've already said so). I'm just saying that using the logarithm gives, more accurate, better quality and timely signals, which in turn is reflected in the profit curve, it becomes better, flatter and slightly steeper.