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HockeyPlayer


Total Posts: 125
Joined: Nov 2005
 
Posted: 2009-09-14 23:06
If you are trading the cash bonds (btec, espeed) against the treasury futures, how do you determine a ratio so that the basis does not move intraday?  For naive pairs (10 futures vs 1 cash), it appears that the basis moves significantly intraday. 

FDAXHunter
Founding Member

Total Posts: 8362
Joined: Mar 2004
 
Posted: 2009-09-15 09:12
No matter what ratio you use, the basis will always move, that's why there are basis traders Smiley

Depending on what you want to capture, exactly, you use different hedge ratios. The most common hedge ratio is DV01 (adjusted for optionality).

The Figs Protocol.

Martinghoul


Total Posts: 866
Joined: Oct 2008
 
Posted: 2009-09-15 12:41
I agree with FDAX. The fact that the bugger moves is the whole point of trading basis.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

HockeyPlayer


Total Posts: 125
Joined: Nov 2005
 
Posted: 2009-09-15 15:14

> Depending on what you want to capture, exactly, you use different hedge ratios.

If I want to make a market, then I'm looking for a spread that may move a bit in the short (minutes, hours, even a day or two) but regularly comes back to a constant value.  Any suggestions how to construct such a thing?

I'm very new to cash bonds, let me know if what I'm after is impossible.


AIC


Total Posts: 167
Joined: Apr 2008
 
Posted: 2009-09-15 19:04

sounds you want very high reversion pairs. index future rolls/ basis trades, ir curve spreads, corr swaps etc are all about trying to get the reversion. ofcourse a spread that had a mean value of 0 and moved between +10 and -10 (never breaching the limit) would find massive buyers or sellers as highs and lows (very high prob of making money/ good risk return etc) would approach therefore the move to the extremes will become damped till the time all vol will die down and you wont be able to capture any moves.

 

 


Train yourself to let go of everything you fear to lose- Master Yoda

HockeyPlayer


Total Posts: 125
Joined: Nov 2005
 
Posted: 2009-09-15 19:55

> sounds you want very high reversion pairs

Exactly, that is a better way of asking for it than my initial question.  Your explanation of why volatility in perfectly reverting pairs makes sense. 

However, I've been unable to find any non-volatile pairs.  Can you suggest any combinations of cash bonds and bond futures that are non-volatile?


FDAXHunter
Founding Member

Total Posts: 8362
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Posted: 2009-09-15 20:27
HockeyPlayer:Can you suggest any combinations of cash bonds and bond futures that are non-volatile?

Yes, the cash bond and the bond future where the deliverable basked only consists of that cash bond....

Seriously, you need to realize that the bond future basis is one of the most competitive basis trades in the world. There's guys that have been doing this for two decades. They aren't exactly waiting for you to come in there "oh... I'll just buy 14s and sell 16s. And then... I'll sell 16s and buy 14s". There's a lot of competition in that market and if you don't understand what makes up the basis and can price all the optionality correctly and judge various other effects, you're probably better off not touching it. What, you think you're the first guy to figure out that the basis somewhat mean reverts?

Now, if you really want a low-volatility bond basis.... try 13 week T-Bill futures on the CME....Smiley

The Figs Protocol.

jungle
Chief Rhythm Officer
CSD LLC
Total Posts: 3169
Joined: Jul 2004
 
Posted: 2009-09-15 20:43
There is a paper on HFT pair trading in Treasuries.  Google it.

HockeyPlayer


Total Posts: 125
Joined: Nov 2005
 
Posted: 2009-09-15 21:45

I realize the basis trade is competitive.  While I'm new to bonds, I'm not new to reverting pairs.  We have significant experience trading such pairs, as well as a low latency platform for execution. 

What I don't know is how to construct a stable pair out of cash bonds and futures.  Are you telling me that constructing the pairs is difficult, or that being able to get an edge in the pairs will be difficult?  If I can figure out a stable pair, we'll be able to see if our system is fast enough to get the edge.

@jungle, thanks for the paper tip; I found Nath's paper from 2003.  While interesting, it talks about trading once a day, while I'm looking to trade 100+ times/day. 


dgn2


Total Posts: 2065
Joined: May 2004
 
Posted: 2009-09-16 02:16
But you understand the optionality in the futures contract right? You understand where extra gamma comes from or is that what you are trying to understand?

...WARNING: I am an optimal f'er

sharpend


Total Posts: 279
Joined: Aug 2007
 
Posted: 2009-09-16 02:19
just last week I had a discussion about the cash/futures trade and was told the traders I knew of had moved to greener pastures. It sounds crowded so I would be interested to see someone having success trading this without synergies from other strategies.

jungle
Chief Rhythm Officer
CSD LLC
Total Posts: 3169
Joined: Jul 2004
 
Posted: 2009-09-16 03:01
Sounds like you really just want to do RV.  Tuckman might be worth reading.

HockeyPlayer


Total Posts: 125
Joined: Nov 2005
 
Posted: 2009-09-16 14:49

> But you understand the optionality in the futures contract right?

I do not.  Pointers or explanations appreciated.


Martinghoul


Total Posts: 866
Joined: Oct 2008
 
Posted: 2009-09-16 15:07
> I do not. Pointers or explanations appreciated.

Galen Burghardt is your man... 'Treasury Bond Basis' is his book that should help you understand.

As jungle mentioned, if you're looking at basis specifically, it's one thing. If you're looking at RV trades in USTs more generally, there's a whole plethora of possibilities.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

HockeyPlayer


Total Posts: 125
Joined: Nov 2005
 
Posted: 2009-09-16 15:44

What is an RV trade?  Googling for that finds lots of recreational vehicle sites.

I just ordered the Burghardt book, thanks for the recommendation.


Martinghoul


Total Posts: 866
Joined: Oct 2008
 
Posted: 2009-09-16 16:08
RV = Relative Value

It's when you buy one thing, sell another. Then both go in your face and you get stopped out and canned. Happened to a lot of people last year in a whole variety of strategies/asset classes.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

jungle
Chief Rhythm Officer
CSD LLC
Total Posts: 3169
Joined: Jul 2004
 
Posted: 2009-09-16 17:39

RV at its best


Jurassic


Total Posts: 136
Joined: Mar 2018
 
Posted: 2018-05-13 19:25
>RV at its best

Would you say though RV is a safer strat than macro on the whole for the average guy?

Jurassic


Total Posts: 136
Joined: Mar 2018
 
Posted: 2018-05-13 19:26
Where can I find a simple overview on the index futures rolls and basis trades strategies?

tabris


Total Posts: 1255
Joined: Feb 2005
 
Posted: 2018-05-14 01:37
RV isn't any safer than macro on the whole... you need to quantify what constitutes your edge and why. Honestly, RV is just a fancy word for market making on the buy side where you have to pay bid offer so you widen your mean reversion parameters.

And people already suggested books about futures and basis in the thread

Dilbert: Why does it seem as though I am the only honest guy on earth? Dogbert: Your type tends not to reproduce.

Jurassic


Total Posts: 136
Joined: Mar 2018
 
Posted: 2018-05-14 18:47
Does anyone have a good source about RV fixed income trading, Tuckman didnt seem RV focused when I looked through contents

mtsm


Total Posts: 217
Joined: Dec 2010
 
Posted: 2018-05-16 04:35
It's as RV focused as it gets actually. There are a couple of other sources, some dealer research here and there. You have to spend the time, no shortcuts...
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