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Seasonal Trades


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Seasonal Trades

  #251 (permalink)
mosalem2003
Toronto
 
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The Futures spread butterflies should be the lowest risk trades as it hedges the price direction and the spread direction.
I have experience with the Treasury yield curve butterflies at the front, belly and backend of the curve. I have the theory of the flies for CL and NG.
Given that depth of your experience @SMCJB @myrrdin:
What is the reference to read about the spread futures butterflies, book, website, etc.
What is your strategies for trading ? How to analyze, when to enter , when to exit?
Do you have numerical value for margins , I am planning to switch to IBKR and I think they are safest broker for employing flies. I hope we can trade the fly as a single ticket under Globex. I will try to search where CME listed them.
Is there any service that provide butterfly trades in commodities CL, NG, beans, etc ?

SMCJB View Post
So everybody is on the same page.

There are several ways to construct an OPTION BUTTERFLY. An Iron Butterfly is where you Buy (Sell) a Straddle - aka the body - normally at or close to the money - and simultaneously Sell (Buy) a Strangle - aka the wings - normally an even distance away from the Straddle. For example with CL Z1 trading 59.75 I might Buy the 60 Straddle and Sell the 58-62 Strangle. This would be called a 58-60-62 Iron Fly. I am Short the 58 Put, Long the 60 Put & Call and Short the 62 Call. Alternatively I could buy the 58-60 Call Spread and sell the 60-62 Call Spread. This would be called a 58-60-62 Call Fly. Finally I could buy the 60-62 Put Spread and sell the 58-60 Put Spread. This would be called a 58-60-62 Put Fly. All 3 have identical payouts. If the distance between strikes is uneven, the structure is called a Broken Wing Butterfly. For example the Crude 57-60-62 fly would be a broken wing fly, since the difference in the strikes is different.

A FUTURES BUTTERFLY involves buying one futures spread and selling a second futures spread that share/involve the same contract on one leg. For example I might buy the CL V1-X1 Spread and sell the CL X1-Z1 spread. This would be called a V-X-Z Butterfly. Your position is Long 1 CL V1, Short 2 CL X1 (aka the body) and Long 1 CL Z1. Another example is the 2s-5s-10s @Schnook mentioned. In this case you would be buying the 2 Year Treasury vs 5 Year Treasury spread and then selling the 5 Year Treasury vs 10 Year Treasury. Your position is Long 2yr Treasury, Short 2x 5yr Treasury and Long 10yr Treasury.

Some markets, (Crude, Natural Gas, Eurodollars come to mind) have Futures Butterfly's listed as tradable instruments on Globex. In Crude popular butterflys are 1 month (ie VXZ), 3 month (normally in the HMUZ cycle so HMU for example), 6 month (normally in the MZ cycle so M1-Z1-M2 for example) and 12 month (normally only in Zs so Z1-Z2-Z3 for example). In Eurodollars 3, 6 and 12 month butterfly's are all traded, for all months. So unlike crude, things like U1-U2-U3 do trade. Eurodollars also trade Butterflys on the Packs. So for example there is a Jun21 Pack Butterfly. This involves buying the Jun21 Pack, selling the Jun22 Pack and buying the Jun23 Pack. The Jun21 pack is actually the package of 4 contracts, in this case Jun21, Sep21, Dec21 and Mar22. So the Jun21 Pack Butterfly actually involves 16 contracts spread across 12 different expiry months!

Even more complicated, Eurodollars has something called 'Double Flys' listed as tradable instruments. Just like a Butterfly it's the combination of two spreads, a double fly is the combination of two Butterflys. So you might buy the M1-U1-Z1 Butterfly and sell the U1-Z1-H2 Butterfly. Hence your position is Long 1x M1, Short 3x U1, Long 3x Z1 and Short 1x H2. This trade will make money if the U1-Z1 spread underperforms the M1-U1 and Z1-H2 spreads. ie you would buy the M1-U1-Z1-H2 Double Fly if you believed the U1-Z1 spread was over valued versus M1-U1 and Z1-H2.

I do trade Futures Butterfly's.

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  #252 (permalink)
 jokertrader 
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Just to add flys can be commission intensive. Also not all flys are implied for example in CL implication is turned on for the first 12 months for certain flys and for few more years only for specific (6 and 12 month June and Dec flys).. for other commodities there are different flys that are implied.. in Grains you will find more of the flys implied.. what this means is u can trade it as 1 ticket without much slippage.. also Not sure IBs take on reduction in margin for these


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  #253 (permalink)
 myrrdin 
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mosalem2003 View Post
The Futures spread butterflies should be the lowest risk trades as it hedges the price direction and the spread direction.
I have experience with the Treasury yield curve butterflies at the front, belly and backend of the curve. I have the theory of the flies for CL and NG.
Given that depth of your experience @SMCJB @myrrdin:
What is the reference to read about the spread futures butterflies, book, website, etc.
What is your strategies for trading ? How to analyze, when to enter , when to exit?
Do you have numerical value for margins , I am planning to switch to IBKR and I think they are safest broker for employing flies. I hope we can trade the fly as a single ticket under Globex. I will try to search where CME listed them.
Is there any service that provide butterfly trades in commodities CL, NG, beans, etc ?


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My experience in trading futures spread butterflies is very limited. I am sure SMCJB can contribute significantly more than I can.

Best regards, Myrrdin

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  #254 (permalink)
mosalem2003
Toronto
 
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myrrdin View Post
My experience in trading futures spread butterflies is very limited. I am sure SMCJB can contribute significantly more than I can.

Best regards, Myrrdin

I think the concepts are identical, so we are open for all strategies that employ futures and its options. We would appreciate your input as well @myrrdin for the Commodity options butterfly strategies.

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  #255 (permalink)
 
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 SMCJB 
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@mosalem2003 unfortunately there are very few Futures Butterfly resources that I know of, and the few that you can find are mostly Eurodollar focused. This is the domain of exchange members (more later) and proprietary trading shops, not retail traders.

Anyway onto an example.

According to CME Core, Margin Requirements are
CL 22J $3600
CL 22J-22K Spread $160
CL 22J-22K-22M Butterfly $81
CL 22K-22M-22N Butterfly $80
CL 22J-22K-22M-22N Double Butterfly $106
(Member rates, non-members will be 110% of this)
So yes Butterflies have super low margin requirements (in some products) and Double Butterflies even lower! I say some products because not all products have similar offsets. For example a Futures Butterfly in say Gold is margined as two spreads. Hence the margin requirement is double that of a spread, unlike in crude where it is half that of a spread. You will notice in this example the double-fly has a further 35% reduction in margin!

Now looking at settlements tonight 4/22/21
J22 57.92
K22 57.61
M22 57.34
N22 57.04
so
J22-K22 spread 0.31
K22-M22 spread 0.27
M22-N22 spread 0.30
and
J22-K22-M22 butterfly 0.04
K22-M22-N22 butterfly -0.03

So looking at those spreads, you could think that the K22-M22 spread is low. So you may want to sell the J22-K22-M22 butterfly at 0.04. If we assume 0.01 in costs, and that you can get out at 0, you would make 0.03 which is $30. Given the margin requirement is $81 thats a 37% return on margin. Alternatively you may want to buy the K22-M22-N22 butterfly at -0.03. If we assume 0.01 in costs, and that you can get out at 0, you would make 0.02 which is $20. Given the margin requirement is $80 thats a 25% return on margin.

Now lets assume you do both, aka the double fly, you sell the JKM and buy the KMN and collect 0.07, pay 0.02 in fees leaving you 0.05, which is $50. Given the margin requirement is $106 thats a 47% return on margin! FYI you may need to hold some of these trades more months, in this case maybe 6+ months. Still nice return on capital.

I know that's a lot of if's, but take a look at the CL JKMN double fly for 2021 and 2020 and 2019.

As @jokertrader said, commissions and exchange fees are intensive. I'm really not sure if you can trade something like this without an exchange seat.

Lets assume you do NOT have a NYMEX seat. Exchange fees are $1.50, NFA fees are $0.02 and lets assume your paying Interactive Brokers $0.85. So that's $2.37 per lot. A Butterfly is 4 lots per trade, or 8 lots per round turn, so $18.96. Makes my '0.01 in costs' above look bad?! Now lets assume you do have NYMEX seat. Exchange fees are now $0.70, NFA fees are $0 and lets assume your paying only $0.25 to your FCM. That's only $0.95 per lot or $7.60 per Butterfly round turn. Now my '0.01 in costs' is high. With a fee structure like this you can trade Butterfly's for 1 tick and still make $2.40!

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  #256 (permalink)
 
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 SMCJB 
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I really should add that what I outlined above really is best case scenario, and that execution is as crucial as fees. If you give up a tick in slippage getting in and out that eats a lot of your profit. Hence to really be effective at that trade you really need to be using an Autospreader, which is a software product that can cost $1000/month. Add in the cost of a seat which is $500/month, plus $135 in data fees since your now a professional and your fixed monthly costs are probably close to $2k. If your only trading a 1000 lots a month that adds $2/lot to your fees and makes it uneconomical. But if your trading 10000 lots/month its only 20c, and at 100,000 lots a month it drops to 2c. Of course there are other butterflys that move around a lot more (ie the CL Z1-Z2-Z3 Butterfly) which would make execution and fees much less important. I do think that the JKMN double fly though is a much higher percentage setup than something like the CL Z1-Z2-Z3 Butterfly

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  #257 (permalink)
 myrrdin 
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One of the seasonal trades working well this year is the RB-HO spread. The actual chart follows the seasonal chart nicely for quite a while.

I had exited the trade using the May contracts in the end of March with a nice profit, and re-entered in the end of last week using the July contracts. On the one hand, the trade has moved rather far this year, and profit potential seems to be limited. On the other hand, vaccinations and the warmer weather in spring should reduce the risk of COVID19, and car drivers should be more active in the net couple of weeks.

This trade is among my long term favorites for many years.

Any comments are highly welcome.

Best regards, Myrrdin

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  #258 (permalink)
mosalem2003
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I would guess the fundamentals as in winter time HO rallies and the spread narrows. In summer time, RB demands rallies and HO demand drops, and spread widens?
How much of margin was used and the profit potential? What was the maximum drawdown?



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  #259 (permalink)
 myrrdin 
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mosalem2003 View Post
I would guess the fundamentals as in winter time HO rallies and the spread narrows. In summer time, RB demands rallies and HO demand drops, and spread widens?
How much of margin was used and the profit potential? What was the maximum drawdown?



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Initial margin at IB is approx. $2000 per spread.

Data for the July spread, which, according to MRCI, should run for about 8 weeks: According to MRCI, average profit since 2006 is approx. $4000, and there were 3 losers since 2006, only one being significantly higher than $1000. Currently, MRCI recommends a protective stop of $3600. If this stop had been used since 2006 it would have been hit 3 times. These figures assume using standard entry and exit data by MRCI. But it is possible to do better.

Best regards, Myrrdin

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  #260 (permalink)
mosalem2003
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It's promising data, as if the spread long maintains for 8 weeks, we can accumulate on all the dips or discounts and build a position.

Did you try also calendar spreads for CL, NG, HO?

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