So I'm currently a Junior Trader, prop trading and making markets in energy products. Not officially trading yet, as I'm still learning the product. I have a few questions that I can't figure out.
1) Let's say I'm bought Jan19-Feb19 and Feb19-Mar19 spreads and I want to unwind down my positions. I can either offset these as individual spreads or do a combo between the Jan19-Mar19, depending on which is richer and has more liquidity. I asked my senior trader and I can't seem to understand, so anyone who can explain who be very helpful.
2) Let's say I bought a Cal20 and I was short front outright, in this case, Jan20... Why do ALL of my spread positions down the curve flip to short? Mathematically, I understand why but I need the logic sense?
3) If I buy strip, let's say a Cal19 strip, why do I want my front month spreads to go lower?
break down your positions for each spread and denote each contract with entry prices, just so its clear exactly what you are referring to.
For example, short the jan 19/feb 19 crude futs spread at 27 cents = long 10 Jan 19 futs 51.11 vs short 10 Feb 19 futs 51.38 (short indicates you want the spread to compress)
(this way, its clear how your P&L will move...some people switch the orientation when they think of spreads...so its better to start with the specifics, and then work backwards to the terminology of your group)
if all these trades are in one book, and sizes are the same, i would think that you are flat the febs, and just have on jan/mar. Now, whether there is an arb to be made using feb to leg out of your jan/mar spread....thats up to you to figure out based on market conditions.
Ah so in a Jan19-Mar19, the Feb19 is flat? I feel like an idiot. Obviously the Mar19 leg is short so between Feb19 offset themsheleves... so in a sense, winding down your two spread positions using Jan-Mar combo doesn't make any sense... right?
Anything for the remaining questions? Appreciate your help.
And what about Jan-Apr... you're synthetically creating two spread positions? So in reality, if someone sells me a Q1 strip, I'll have three outrights but let's say I had two Mar-Apr spread first, how would my new positions look? My biggest struggle is lets say i have 10 short Jan outright and I bought one cal19... I'm literally building short calendar spreads down the curve with majority of risk, weighting in the fronts. Makes no sense why this is logic? Is it because the outrights dictate the directions of the spreads?
when in doubt...list all positions in an excel spreadsheet...then sum them up to get your net position
I do have a position tracker on excel that feeds automatically from the platform but in case of hedges I'm trying to think of the logic behind it in the case I have to find optimal hedges or maybe think of converting my spreads into flies or condors to make a scratch on a losing position and etc...
i might be misunderstanding something...its hard to do this kind of thing without a breakdown of your positions (and i'm assuming you are talking about small stuff...so it won't really matter)
(M - F) + (F - J) = M - J D + C +B +A - 4A = (D -A) + (C - A) + (B - A)
hope this helps like and subscribe for more top trading tips
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