I'm having some difficult hedging spreads that aren't moving in linear, especially with the forward curve not being smooth due to seasonal changes. How do you guys hedge your bigger sized positions? Possibly hedge it off with a different spread, possibly using a correlation / covariance matrix?
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depends on the product. if you are trading crude oil calendar spreads...my response would be different from trading eurodollar spreads, ES vs NQ, crack spreads...etc...because they all trade differently
however, in pretty much all instances....trading spreads is not a reprieve from learning how to trade the outright product (eg..if trading crude oil calendar spreads, you should still be learning how to trade front crude oil futures, separately the back contracts....which is in itself an incredibly time and mental energy intensive process).
however, if for example you are short a spread that moves asymmetyrically with the outright front market...richens in a both a selloff and a rally....then you are just in a bad position being short, and there is no "hedge". Do you think this richening will reverse? Why? Why not?
anybody can click the buy/sell buttons...the hard part is knowing which buttons to click. so, if i was on your desk, i would first ask, what was your trade thesis....why did you get into your positions...what was your plan...and what happened that has changed the landscape to cause the current price action? Are you missing some fundamental data?
Trading is about creating a portfolio of positive expectancy outcomes (and you should have some concrete thing that you can measure to determine "positive expectancy")...and cut positions when we are wrong, so that we can live to fight another day.
Sometimes, there is no hedge...a curve is going to move to where its gonna go no matter what, and that may cause other spreads elsewhere to move as a byproduct, etc..