If I Had Traded ES Bull Spread

Trader's Mindset

Sep 14

Recently, in my post The Real Reason You Move Your Stop I mentioned that,” I opened a risk limited 2-day call spread on the ES 2980-2990.

First keep in mind, I am not a professional, do not provide financial advice, never make any performance claims whatsoever, and do not provide recommendations.

Keep in mind, the trade logs below might be from a paper trading account:

Hypothetical Entry
Hypothetical Exit
Max Risk:$195
Max Reward:$305

In this case, the bull spread performed very similar, as traded, to a similar scaled e-micros trade with optimal stop. The key phrase is “with optimal stop”. This trade incurred around 17 points actual adverse excursion. That’s a deep enough excursion to take out some reasonably placed stop losses.

While I have not tested how the spreads compare to the e-micros over a lot of trades, my best guess based on studies I conducted on binaries is that assuming positive expectancy, you would see a smoother equity curve trading the spreads– lower std dev per trade– but a lower net return compared to similar futures trades. And, that makes perfect sense that you pay some net return for the risk control.

You could also hold the futures trade for a higher return– although you do risk giving back the open profits.

This was a good example though where the spread made sense because I only had a general sense the market would move higher but not a specific prediction or immediate knowledge. The key with this trade was structuring it so I wouldn’t be stopped out. This is the type of trade that could cause large losses if attempting to trade with over leverage on the futures.

Now, here is another point too– for reversal style plays, it is much safer to average down with spreads because you are only adding to your risk whereas with futures you multiply it.

For example, let’s say you thought the market would reverse and start buying spreads strategically above the market. Eventually, you will be at max– the market could drive lower but your risk is fixed.

On futures, if you add then if you get to max size, additional movement against your position is multiplicative.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.