Since a few weeks i am looking in to bond spreads and butterfly spreads to hopefully increase my profitability. So far i find it very interesting but i keep struggling with the correct multiplier. To be clear, i am trading ZN and ZB, not the spreads, i watch the spreads to get my entry's more accurate. The multipliers i use for spreads are the multipliers listed on the CME website http://www.cmegroup.com/trading/interest-rates/files/ics-ratios-2017-06.pdf So here is the first question, what is the best spread to watch when i want to trade ZN or ZB? Is it 3-1 ZN-ZB or is it 1-1 ZN-ZB. Or 3-2 ZF-ZN or 1-1 ZN-ZF? Second question is what multipliers should i use to make butterfly spreads? It looks like a lot of the information i am finding online is only making it more complicated since i see different multipliers/spreads.
http://www.cmegroup.com/tools-infor...interest-rates/invoice-spread-calculator.html The ICS ratio spreads are NOT DV01. They are a 'small unit' number done by the exchange. To get the DV01 ratio: ZN dv01 = $78.72 ZF dv01 = $53.15 ZB dv01 = $267.86 Real Ratio of FYT = (78.72/53.15) = 1.48 ZF to ZN = 2.96 to 2 (around 3:2, close to the book one) Real ratio of NOB = (267.86/78.72) = 3.4 to 1 Work out the fly ratios yourself. You asked, "what is the best spread to trade when I trade ZN or ZB" There is no 'best' spread to trade because its up to your style and your strategy which needs to be back-tested and viable. The multipliers you could make your FLYS completely depend on your ratios. If you do the DV01 Fly Ratios like the ones I gave you then you will have less volatility. However it's something like 15-25% better in the blow-outs. But if you don't have a consistently profitable strategy you'll end up losing anyway.
Thank you for your reply, i was already using this website to calculate the DV01 ratio. The main reason i made this thread is because i am struggling with the correct way to put this spread on a chart. One person told me the correct way would be (using standard ratio's): 3*ZN-ZB-(4*ZB-3*ZN) for the ZB butterfly 3*ZF-2*ZN-(3*ZN-ZN) for the ZN butterfly However someone else told me this doesn't look right but didn't know for sure. I am doing a lot of research online but i keep struggling to find the right way to calculate the butterfly's.
Those flies don't look right to me. How would a fly make sense as ZN vs ZB vs ZN? That's not a fly that's just some weird thing. First ask yourself what you're fundamentally trying to trade. If you're trying to trade the relationship of various rates along the curve, e.g. +ZF, -ZN, +ZB, then you have a fly (e.g. ZF and ZB are wings, ZN is body). Look at s0mmi's example, and you'll see there's 3 instruments there. The same thing would extend to a condor where 4 instruments are involved, e.g. +ZT, -ZF, -ZN, +ZB (short and long end vs belly as an example), although I have never traded such a thing in rates (nor much rates myself really).
You need to look at: ZF (ZN, ZN), ZB You must have double the ZN leg after you match the ratios with the same ZN number. A Fly has a body in the middle which is matched to the wings. E.G. If ZF:ZN ratio was 5 to 3, and ZN:ZB ratio was 3 to 1, then the Fly ratio would be 5-lot (ZF), 6-lot (ZN), 1-lot (ZB) I'm going to go out on a whim and say that you really need to investigate the individual spreads first (e.g. FYT and NOB) before you start researching the Fly more. The U.S. yield curve is the most refined and efficient curve in the world and having a T-Note weighted spread will skull f*ck your face to oblivion on red-tier events and data. Example of the Dangers: A simple reason for this is that since Europe is generally considered to be a giant piece of sh*t floating on the ocean. Germany is only 40% of the Bond risk of Europe. This means that the French, Italian and Spanish (and other) bond punters will have to be hedging with the Bund and definitely T-Notes. There is a lot more play out there but this is just one angle you need to be aware of and an example of why you can get murdered due to European leads if you don't know what you're doing. When you chart the ZF/ZN/ZB fly it will look as tight as a virgin but will have trendy drifts from time to time and since you have a doubling of leg-risk + brokerage will need to be taken care of for this to put you ahead over time. Donald Trump Day (November 2016) Just an example of how the T-notes can jizz on your face. I'm not going to tell you all the answers here but if I was to start doing research, I would go back starting 1-year and compare the following charts: 1. The U.S. Fly 2+3. The FYT and NOB individually I would go through each day, side by side, and look at the range/volatility/trend days and make a note of it. On the larger moves of the day for the FYT and the NOB, I would compare this to the FLY. If the FLY ends up reducing your risk by a lot over the year (e.g. sometimes instead of something going 10-ticks offside the FLY will only put you 7-ticks offside) then you are onto something and can reverse engineer a strategy to take advantage of this. However, don't proceed without doing research first. It doesn't matter if you're DV01 neutral or however you try to change some bullsh*t ratio, you are doubling the World Treasury Bond (ZN) in a spread and that comes with a lot of baggage.
I now just see there is a typo in my example of the fly's Anyway, thank you very much for the information s0mmi!
The least mean-reverting spreads in the world are most definitely the German Bond products/yields because they are rife with cheaters, insiders, leaked-minutes and complete f*cking scum b4stards. On top of this, you have every single high-unemployment and vulture economy in Europe which is leaching off Germany. This creates an insane amount of hedging inter-play. A recent example of this was the rumours of the ECB dropping QE and then actually cancelling the 'rumour', then a week later it was in the minutes. The people on-top, specifically f@ggots like Draghi and the rest of those political dogs, are all most definitely linked with the largest accounts and the big bond holders. The industry is full of insider and secretive scum f@ggots. I have been sitting at my computer 16-18 hours a day, every day, for over 6.5 years now, and I know when someone is cheating. European bonds and "sources" take the cake for this. Other note-able mentions were the dodgy Reserve Bank of Australia leaks in 2015, as well as the Bank of England insider trading scandal (which they actually got fined for). These guys are cheating all the damn time, and having a mean-reverting strategy is how you increase the probability of being on the wrong side of a VICIOUS move. The second-least mean-reverting spreads in the world are the U.S. spreads and Flys. The only reason they are not first is because they are at least super-efficient and have players all across. Yields do play around the belly and there is curve play all the way from the short-end up to the ultra long-end. Remember, Italy, France and Spain are as useful as an ashtray on a motorcycle, so the Institutional Bond Traders must hedge their long end with the German 30-year Buxl. This creates a big mess for the average punter like you. America does not have this weird incest of play so you are at least not prone to the enormous cuckening one would experience if they had to step into the filth known as Europe. If I wanted to lose a career as quick as possible, I would approach the U.S. curves with a mean-reverting type of philosophy. I cannot stress this enough, do not ever approach a U.S. or Scummy-European bond spread or bond fly with a mean-reverting philosophy. Just back-test for a year and you will see why this is the equivalent to putting a gun to your head and pulling the trigger. If you coded some sort of algorithm or strategy which had back-tested distances of high/lows, with automatic stop exits, then you are fine! But if you are using discretion, then I'm sorry, you're going to eventually be covered in the fecal matter from those secretive insiders that somehow get the leaked information before its publicly released. Now... finally.. onto the good news; These guys are easy to beat if you know what you are looking for. If I was to guide you into the right direction, it would be create a strategy which looks for underlying strength or weakness, getting in on trends or counter-trend pull-backs, and being very careful of Red-Tier U.S. data like CPI for the moment being (because every central bank in the world is keeping a close eye on CPI.... as they are ALL ready to pull the trigger on hiking rates). Keep an eye on ForexFactory, and keep an eye on the summary of every single FOMC and FOMC minutes thats released. Just read the main jist of the releases and you will start to 'tune in' to what the market is expecting/feeling from the upcoming data.