AQF. Week C. Spread Trading. An Introduction. 1 of 23 July 15, Christopher Ting

Transcription

1 Spread Trading An Introduction 1 of 23 July 15, 2017

2 Ex-SIMEX Locals Association of Financial and Commodity Traders Source: AFACT 2 of 23 July 15, 2017

3 Revenge of the Geeks During the open-outcry era, locals who were less vocal couldn t match the big-time order-fillers. But when the floor gave way to screen-based trading, locals who adapted to the new landscape of computer and automated trading survived and thrived. 3 of 23 July 15, 2017

4 Trading Arcade 4 of 23 July 15, 2017

5 Calendar Spread This is the simplest form of trading strategy and very easy to implement. Roll When the current near month futures contract is about to expire and to be replaced by the far month contract, i.e., the far month is going to become near month. CTA (Commodity Trading Advisor) and other investors need to roll over their futures positions. 5 of 23 July 15, 2017

6 Calendar Spread Conventions Quoted as Calendar Spread = Back Month Futures Price Front Month Futures Price CTAs who have long positions in the front month and want to roll over will buy the calendar spread. By buying the calendar spread, CTAs simultaneously close their front month futures and buy the back month futures CTAs who have short positions in the front month and want to roll over will sell the calendar spread. 6 of 23 July 15, 2017

7 Limit Order Books Trade date: December 10, of 23 July 15, 2017

8 What s the Fair Price of a Calendar Spread? The fair price of a calendar spread is simply the difference of the fair prices of front month and back month contracts: Fair Calendar Spread = Back Month Fair Price Front Month Fair Price 8 of 23 July 15, 2017

9 Market Neutral Calendar spread is inherently a long-short strategy. Suppose the fair calendar spread is -1 Suppose the back month is traded at 330 index points and front month at 331 index points. The market price of the spread is -1 index point The market calendar spread is traded at the same value as the fair calendar spread, If market rallies, the back month moves up by x points, the front month should also move up by x points. The spread is still the same x (331 + x) = x x = -1 9 of 23 July 15, 2017

10 Outright Calendar Spread TT In this example of SIMSCI calendar spread, the fair spread is 0.8. Why is the market outright spread different from the fair spread? 10 of 23 July 15, 2017

11 Calendar Spread Jan 12, 2016 Outright Spread Synthetic Spread Quoting Leg Hedging Leg 11 of 23 July 15, 2017

12 Buying Calendar Spread with AutoSpreader 12 of 23 July 15, 2017 Quoting leg as bait Hedging leg Jan 12, 2016

13 Selling Calendar Spread with AutoSpreader 4 13 of 23 July 15, 2017 Quoting leg as bait Hedging leg Jan 12, 2016

14 Buying and Selling Synthetically 14 of 23 July 15, 2017 Quoting leg as bait Hedging leg Jan 12, 2016

15 Calendar Spread is Market Neutral Jan 16 and Feb 16 prices have come down a lot, but the calendar spread does not change much. Jan 26, of 23 July 15, 2017

16 Sold and Bought a Calendar Spread Order Date Order Time Exch Time Workstation Time Order GW Product Contract Order Type B/S P/F Price Qty 1 26-Jan-16 12:16:52:756 12:17:57:534 12:17:57:536 SGX-C SGP 16-Feb Limit S F Jan-16 12:17:57:534 12:17:57:591 12:17:57:592 SGX-C SGP 16-Jan Limit B F Jan-16 12:17:57:592 12:17:57:000 12:17:57:000 Desktop Autospreader SGP Synthetic S F Jan-16 13:09:51:235 13:09:52:449 13:09:52:449 SGX-C SGP 16-Feb Limit B F Jan-16 13:09:52:449 13:09:52:502 13:09:52:503 SGX-C SGP 16-Jan Limit S F Jan-16 13:09:52:503 13:09:52:000 13:09:52:000 Desktop Autospreader SGP Synthetic B F Sold SGP Sold Feb bought Jan Bought SGP Bought Feb Sold Jan Earned 0.05 index point, which is one tick, i.e., $5 Need 4 trades to complete the round trip 16 of 23 July 15, 2017

17 Outright versus Synthetic Whether using outright or synthetic, each position involves two trades. You can use the outright to close the calendar position opened by synthetic. Short a calendar spread synthetically Sold SGP Bought SGP Long a calendar spread outright at T+1 session Sold SGP Bought SGP of 23 July 15, 2017

18 P&L of a Round-Trip Calendar Spread SGP Jan16 lost 39 ticks = 1.95 index points SGP Feb16 gained 41 ticks = 2.05 index points The net gain is 0.10 index points, which is S$10. Is the net position 1 contract oustanding? 18 of 23 July 15, 2017

19 What are the risks of calendar spread? Mis-hedge! When a synthetic spread order is legged, a mis-hedge occurs and the spreader becomes a direction speculator at the wrong starting line. Basis risk: the spread price can change Position size needs to be large, hence greater exposure. 19 of 23 July 15, 2017

20 Summary of Spread Trading Quoting orders as baits Limit orders placed on the less liquid leg Hedge orders When the quoting orders are hit, hedge orders are triggered and enter the more liquid futures market If the quoting orders are sell (buy), hedge orders are buy (sell). Hedge orders are limit orders. How do you do spread trading, buy and sell contracts on different markets simultaneously? Answer: HFT! 20 of 23 July 15, 2017

21 Nikkei 225 Index Futures Big Nikkei at Osaka Mini Nikkei at Osaka tick size: 10 points, multiplier 1,000 tick size: 5 points, multiplier 100 Regular Nikkei at SGX tick size: 5 points, multiplier 500 Regular Nikkei NIY at CME tick size: 5 points, multiplier 500 Mutual offset Regular Nikkei NKD at CME tick size: 5 points, multiplier $5 21 of 23 July 15, 2017

22 Calendar Spread for Nikkei Futures All share the same underlying Nikkei 225 index 5 contracts of mini versus 1 contract of regular 1 Big Nikkei versus 2 SGX s regular NK 1 CME regular NIY versus 1 SGX s regular NK What about 1 CME regular NKD versus 1 SGX s regular NK or CME s NIY? 22 of 23 July 15, 2017

23 CME s NKD, NIY, and SGX s NK NKD Mar16 Bid Size Price Ask Size NIY Mar16 Bid Size Price Ask Size NK Mar16 Bid Size Price Ask Size of 23 July 15, 2017

24 Takeaways Spread trading is a long-short strategy. To open one spread position, you need to have two trades, and likewise when closing a spread position. The fair value of spread can be computed. 24 of 23 July 15, 2017