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Hi guys, not sure if I've posted in the correct section but....
I trade oil futures currently, and spreads/flies more specifically, and am looking to add a bit more structure to what I do and I was looking for a bit of help if anyone could entertain my curiosity for a bit. I started trading oil future spreads a few months ago, but have come from a background of trading fixed income options. In fixed income we always have a futures curve (yield curve), and this is basically exactly the same in oil, for example Mar15-Jun15-Sep15-Dec15-Mar16….etc.
Now when I was trading FI options we used to calculate a beta for the whole curve, calculated against the furthest future in this case, as it was the one that moved the most. So we could then say well if this future moves 5 ticks, the other months will move 1-1.5-2-2.5 ticks etc etc, and could then have a better idea of what our risk would look like on a big move one way or the other, and would have an idea of what our deltas would be there.
Given I’m now trading futures I had never really looked at this angle as most guys seem to just look at a graph and try averaging in, but I’m beginning to wonder if it’s worth looking in to it. In oil the front expiry is the one that generally moves the most. So what I was thinking was calculating the betas of the various expiry months, basing them off the front future, and then I could calculate a beta for specific spreads or flies. This would also give me an idea of my directional risk as well which isn’t immediately obvious when you’re trading spreads/flies, but as the market moves higher or lower these spreads are of course affected.
So once these betas are calculated I could then have a little heat map, for example, showing me which spreads have underperformed and which have overperformed given how much the lead future has moved. I could also then use these beta numbers to try and be ‘beta flat’ and take out the directional risk associated with these spreads. So for example we could say the lead future is +100 ticks on the day. WX spread has a 0.1 beta so should be up 10 ticks, however its only up 4. YZ spread has a 0.2 beta and should be up 20, but is up 25 ticks on the day. So in this example I would buy the WX spread and sell the YZ spread, and if I bought 20 of the first and sold 10 of the second I would also be ‘beta flat’ so to speak, and would just wait for the spreads to get back in line.
So my first question is, does this sound like a legit way of looking at things? Does anyone else do something similar? Secondly, I’m very much an excel beginner and wonder if anyone could help me calculate these betas in excel, or point me to an example somewhere that could help me? I would probably be looking at hourly data as we trade intra day so was thinking of getting the last 50 hours of data in a spreadsheet that updates automatically and calculate from there. Getting the data into the sheet shouldn’t be a problem because I imagine IT will be able to help, its just the calculations I’m going to struggle with.
Any help would be amazing,
Cheers
I trade oil futures currently, and spreads/flies more specifically, and am looking to add a bit more structure to what I do and I was looking for a bit of help if anyone could entertain my curiosity for a bit. I started trading oil future spreads a few months ago, but have come from a background of trading fixed income options. In fixed income we always have a futures curve (yield curve), and this is basically exactly the same in oil, for example Mar15-Jun15-Sep15-Dec15-Mar16….etc.
Now when I was trading FI options we used to calculate a beta for the whole curve, calculated against the furthest future in this case, as it was the one that moved the most. So we could then say well if this future moves 5 ticks, the other months will move 1-1.5-2-2.5 ticks etc etc, and could then have a better idea of what our risk would look like on a big move one way or the other, and would have an idea of what our deltas would be there.
Given I’m now trading futures I had never really looked at this angle as most guys seem to just look at a graph and try averaging in, but I’m beginning to wonder if it’s worth looking in to it. In oil the front expiry is the one that generally moves the most. So what I was thinking was calculating the betas of the various expiry months, basing them off the front future, and then I could calculate a beta for specific spreads or flies. This would also give me an idea of my directional risk as well which isn’t immediately obvious when you’re trading spreads/flies, but as the market moves higher or lower these spreads are of course affected.
So once these betas are calculated I could then have a little heat map, for example, showing me which spreads have underperformed and which have overperformed given how much the lead future has moved. I could also then use these beta numbers to try and be ‘beta flat’ and take out the directional risk associated with these spreads. So for example we could say the lead future is +100 ticks on the day. WX spread has a 0.1 beta so should be up 10 ticks, however its only up 4. YZ spread has a 0.2 beta and should be up 20, but is up 25 ticks on the day. So in this example I would buy the WX spread and sell the YZ spread, and if I bought 20 of the first and sold 10 of the second I would also be ‘beta flat’ so to speak, and would just wait for the spreads to get back in line.
So my first question is, does this sound like a legit way of looking at things? Does anyone else do something similar? Secondly, I’m very much an excel beginner and wonder if anyone could help me calculate these betas in excel, or point me to an example somewhere that could help me? I would probably be looking at hourly data as we trade intra day so was thinking of getting the last 50 hours of data in a spreadsheet that updates automatically and calculate from there. Getting the data into the sheet shouldn’t be a problem because I imagine IT will be able to help, its just the calculations I’m going to struggle with.
Any help would be amazing,
Cheers
