Making a Living while Cruising

[ImaginaryNumber]

Do you/can you generate futures spreads charts through Interactive Brokers, or do you rely soley upon those charts supplied by MRCI? Once you subscribe to MRCI, are all their past strategies available to their customers, or only a select few of their current recommendations?

MRCI lists a sample of 11 directional trades and 11 spread trades here:

Free Trades

These are the spread trades:
Feb 2013, Natural Gas-Natural Gas: trade not yet closed, but a loss so far
Jan 2013, Wheat-Wheat: loss
Dec 2012, Copper-Copper: profitable
Nov 2012, Bonds-Notes: profitable
Oct 2012, Eurodollar-Eurodollar: profitable
Sept 2012, Heating Oil-Gasoline: profitable
Aug 2012, Copper-Copper: loss
July 2012, Natural Gas-Natural Gas: loss
June 2012, Coffee-Coffee: profitable
May 2012, CAD-AUD: profitable
April 2012, Corn-Corn: profitable

Is this ratio of profitable trades to unprofitable trades typical, in your experience?

[Delfin]

Originally Posted by ImaginaryNumber

Do you/can you generate futures spreads charts through Interactive Brokers, or do you rely soley upon those charts supplied by MRCI? Once you subscribe to MRCI, are all their past strategies available to their customers, or only a select few of their current recommendations?

MRCI lists a sample of 11 directional trades and 11 spread trades here:

Free Trades

These are the spread trades:
Feb 2013, Natural Gas-Natural Gas: trade not yet closed, but a loss so far
Jan 2013, Wheat-Wheat: loss
Dec 2012, Copper-Copper: profitable
Nov 2012, Bonds-Notes: profitable
Oct 2012, Eurodollar-Eurodollar: profitable
Sept 2012, Heating Oil-Gasoline: profitable
Aug 2012, Copper-Copper: loss
July 2012, Natural Gas-Natural Gas: loss
June 2012, Coffee-Coffee: profitable
May 2012, CAD-AUD: profitable
April 2012, Corn-Corn: profitable

Is this ratio of profitable trades to unprofitable trades typical, in your experience?

I only use the charts from MRCI. Interactive Brokers provides charting, but no guidance on spread relationships over time.

Regarding actual performance vs. theoretical performance, yes, they are close. A lot depends on whether you follow all the trades. If you don't, at least by commodity group, then you can't make a comparison. There will always be some slippage due to fees, etc., but it should exceed 10% of the theoretical gain.

You can set up a pretend account at IB, subscribe to MRCI and see for yourself.

[Cormorant]

Just a note of thanks, Delfin. I'm going to check this out.

[Delfin]

Originally Posted by Cormorant

Just a note of thanks, Delfin. I'm going to check this out.

My pleasure.

As noted, perhaps the easiest way to get a feel for what is required is the pretend account at Interactive Brokers plus the subscription to Moore Research. The only final observation is that spread investing seems to me to represent low beta, but only as an aggregate of all trades. In other words, the method is like investing in a mutual fund. Within the fund, individual stocks exhibit greater risk than when aggregated, and individual stocks may display much greater swings than the overall fund itself. Same with spread trading. So, you have to have the ability to stick with the program, and take losses with the gains without freaking out. Easier said than done for many, but if you can, over the course of a year the returns are always significantly greater, in my experience, than anything else I can think of. And only requires touching every couple of weeks or so.

[Normanby]

I've tried to follow this thread and failed. Where did I leave my dunce's hat I wonder...

Can you recommend an idiot's guide to spread trading?

And, do you mind revealing what percentage of your total capital you put into this particular strategy?

I've been reading a book about contrary derivatives trading, as a way of making a living, but it points out many times that one must only play with capital one is prepared to lose.

My question therefore is, what chunk of one's total capital is one willing to lose?
5%, 15%?

Matt

[Delfin]

Originally Posted by Normanby

I've tried to follow this thread and failed. Where did I leave my dunce's hat I wonder...

Can you recommend an idiot's guide to spread trading?

And, do you mind revealing what percentage of your total capital you put into this particular strategy?

I've been reading a book about contrary derivatives trading, as a way of making a living, but it points out many times that one must only play with capital one is prepared to lose.

My question therefore is, what chunk of one's total capital is one willing to lose?
5%, 15%?

Matt

The Moore Research site has the best information I know of on spread trading, but perhaps there are other sources I am unaware of. They have a cheap - $20/mo? - subscription to Jerry Toepke's commentary that describes the rational basis for the spreads they recommend. That is a really good way to understand the real world underpinnings of why certain commodities move in predictable ways at certain times of the year.

I'm not sure how to answer your question on % of capital. I'm not an investment adviser, but I suppose the answer has as much to do with one's personality and risk tolerance as anything else. I can say that if you have an account with less than around $40k you may be restricted in your ability to enter all the trades, and you also have to accept that on starting to trade you might have adverse results that would draw down your account before recovering. That could be very discouraging. The key to this is to be able to accept the downs with the ups and play the long game, as unemotionally as you can. That last requirement is why most people can't do this. Money makes us emotional.

If you look at the hypothetical spread trading results for 2011 on the Moore site, you can see what you're dealing with. In January, trading 1 spread as planned with execution at end of market on the day indicated, with no slippage you would have been up $10k and a week or so later down $10k before finishing the year out up $70k. You'd want around $40k to start, although you might be lucky and get by with $25k, but assume you started out with $40k, how would you feel if it was only $30k after being up to $50k. You get the point. Sometimes winning is just a matter of keeping an army in the field.

[ImaginaryNumber]

Originally Posted by Normanby

Can you recommend an idiot's guide to spread trading?

Matt,
In addition to the helpful information on the MRCI site that Delfin mentioned, here is a link to "Futures Spread Trading Guide" from R.J. O'Brien. RJO appears to be one of the larger futures brokerage firms. You will have to register to get the guide, though it is otherwise free.

Futures Spread Trading Guide | RJO Futures

By email, MRCI told me that their hypothetical spread trading results for 2012 should be posted on their site towards the end of March.

[ImaginaryNumber]

Originally Posted by Delfin

Knowing what you know now, if there was another drought this summer would you not trade the grain markets? Yes, because droughts will affect both legs of a grain spread. This year happened to be particularly bad because of when the drought hit and what grain was in storage. IMHO, it becomes too complicated to weight these factors, so I just follow the historic pattern, relying on the fact that every year, on balance, the spreads develop profitability.

From the RJO Futures Spread Trading Guide I mentioned above, I read:

Intramarket (Delivery) spreads are usually the least risky. This is evidenced by the fact that they usually have the lowest margin requirements, as they are the SAME market (with only DIFFERENT contract months). However, traders should take into account that in the Agricultural commodities, Intramarket spreads between “Marketing Years” can entail more risk than even a straight outright futures position. (For example, Long July Soybeans and Short November Soybeans, known as a “Old Crop vs. New Crop” spread.)

I'm wondering the unprofitable grain trades last year involved "old crop" and "new crop" legs? It would be nice to be able learn to recognize and avoid any obviously risky trades.

[Cormorant]

If my "mad money" amounted to significantly less than $40,000 . . . oh, say, more like $10,000 . . . and I can't make the whole range of trades recommended by MRCI, is there any subset of them that might still give some diversification and low beta? For instance, you left out currencies. . . . What else could be dropped without endangering yourself too much?

Just to keep this cruising-related . . . Damn, I wish I could buy a new Leopard 48! At the very least, I would like to bulk up the cruising kitty for the eventual day when my kids are off to college and my wife and I have the freedom to cruise each winter in Florida and the Bahamas.

[Cormorant]

One other question. . . . the returns for following MRCI's suggested spread trades in 2011 were pretty spectacular. Do you know what they were for any prior years? I poked around on their website but didn't see that info.

[Cormorant]

I'm sort of answering my own question here, not addressing Delfin but for anyone else who might stumble upon this thread.

I found this page on MRCI's website, where they show several graphs (on p.4) of historical theoretical returns on their recommendations.

MRCI 2011 Results

The graphs are small, and hard to pull any sort of precise data from, but you can see the overall positive trend for three different trading methods: straight trades, spreads, and only the spreads on Jerry Toepke's Weekly Spread Commentary. The WSC discusses in depth two upcoming spreads each week, and you can subscribe to only that if you wish (for $135/yr vs $379/yr for full MRCI access) -- so you'd get 8 trades per month.

They all trend upward over time, which we like. :-) The straight trades had a couple of really gut-wrenching years -- one of minus $40,000 and one of minus $100,000. No way I could handle that.

The spreads are sort of miraculous -- one "even" year, a couple of "only" +20K years, but NO down years at all. Plenty in the +$50K territory, and one of +$110K.

The WSC has more volatility, as expected with only half the number of trades, but still trends nicely upward, with one "even" year, plenty of $25K - $45K years, and one small loss last year.

Just eyeballing it, really rough guesstimations, here are the year-by-year results. If anyone can provide the real numbers, please correct these.

STRAIGHT TRADES:
2000 even or slight +
2001 even or slight -
2002 +100K
2003 even
2004 +80K
2005 +100K
2006 -100K
2007 +40K
2008 +300K
2009 +50K
2010 -40K
2011 looks like only slight + on the graph; really +$44,000 so my eyeball estimates may be worth very little here

SPREADS:
2000 +40K
2001 +50K
2002 +25K
2003 +20K
2004 +50K
2005 +40K
2006 +50K
2007 +50K
2008 even or slight +
2009 +20K
2010 +110K
2011 looks like +50K on the graph, but we know it's +69,566

WSC:
2000 +15K
2001 +35K
2002 +30K
2003 +25K
2004 +25K
2005 +10K
2006 +50K
2007 +40K
2008 +10K
2009 even or slight -
2010 +50K
2011 looks like even or slight + on the graph; really -$2888

Needless to say, I'm impressed.

[Delfin]

Originally Posted by ImaginaryNumber

From the RJO Futures Spread Trading Guide I mentioned above, I read:

I'm wondering the unprofitable grain trades last year involved "old crop" and "new crop" legs? It would be nice to be able learn to recognize and avoid any obviously risky trades.

Sorry, I've been traveling and missed this. Yes, it is possible to add analysis to different spreads, but my experience over the last few years is that such efforts don't really seem to help improve results. The one exception I have made is to avoid currency spreads for reasons I've stated above. However, picking this spread vs. that one based on whatever you got may not, in the long run, help you much. At least it hasn't for me.

[Delfin]

Originally Posted by Cormorant

If my "mad money" amounted to significantly less than $40,000 . . . oh, say, more like $10,000 . . . and I can't make the whole range of trades recommended by MRCI, is there any subset of them that might still give some diversification and low beta? For instance, you left out currencies. . . . What else could be dropped without endangering yourself too much?

Just to keep this cruising-related . . . Damn, I wish I could buy a new Leopard 48! At the very least, I would like to bulk up the cruising kitty for the eventual day when my kids are off to college and my wife and I have the freedom to cruise each winter in Florida and the Bahamas.

Cormorant, I would not try this unless you could put a bit more on the line. The amount of $ required to enter all spreads varies depending on the time of year, but $10k would be generally well below the minimum. If you REALLY want to, then just stick with those spreads that are different months for the same commodity. They will have lower margin requirements and will generally have lower volatility. Example - June crude over May crude. The closer the months, the lower the volatility.

Hope that helps.

[Delfin]

Originally Posted by Cormorant

One other question. . . . the returns for following MRCI's suggested spread trades in 2011 were pretty spectacular. Do you know what they were for any prior years? I poked around on their website but didn't see that info.

2011 was pretty typical. They do have a long term chart showing all years, as I recall, although it would be hard to quantify any given year.

[Cormorant]

We're thinking we can probably scratch up enough capital to do all the WSC trades, which are about half of the full slate.

I notice that in 2011, the ALL Spreads batch produced a marvelous $69,000 profit while the WSC actually had its only annual loss (-$2888). Somehow the WSC list got all the bad trades and missed a few of the really good ones.

So I got to wondering how often the two diverged.

Here's a rough summary, based on my already rough estimates:

WSC vs ALL Spreads

WSC made more than ALL: 3 years
WSC made the same as ALL: 1 year
WSC made >1/2 but less than ALL: 3 years
WSC made less than ALL: 5 years

So 7 on the good side, 5 to the bad. About what you might expect from random chance. But it gives me hope that we might do okay for a few years trading just the WSC until we can build up our capital and begin trading all.

In any case, thanks again Delfin. Never would've found this without you. It's a very interesting opportunity.