Basics -Distribution of Trades (by Expiration)

In preparing to write an upcoming blog on “trading in expiring contracts” I first wanted to check to see whether my intuition that trading volume was concentrated in the front contract, was borne out by the numbers.  While there is probably a more comprehensive database at the CME of all trades, I decided to first check with my own trades.  Since I’ve been market maker for 5+ years and have been involved in the majority of trades, it seemed likely that my trades might resemble the universe, but I’ll concede that I may have trading biases (e.g. stick to/avoid/ front contract that may skew the results slightly).

I took my database of 800+ trades (by lot count) and tried to eliminate any trades involving one leg of a calendar spread where there was a buy and sell at the same price, on the same day.  (That is the calendar spread combined with an outright trade may have facilitated an outright trade, but the simultaneous buy and sell of the same contract on the same day at the same price did not by itself indicate interest in trading a contract with that expiration.  My intent was to only capture the outright trade).

The following table shows the distribution of 600+ trades grouped into months to expiration buckets.

Distribution of trades

While more than 60% of the trades (line -right axis) were on contracts within 12 months of expiration, trades within one month of expiration were <10% (blue bar-left axis).    However, there does appear to be some front-loading to the trading in that ~40% of my trades were on contracts with <4 months to go (so typically the front contract) and  ~85% of my trades were on contracts that expired within two years.  Tighter bid/ask spreads in shorter expiration contracts (due to less uncertainty?) may have facilitated greater trading in shorter expirations.

To build volume in longer-dated (>2 years) contracts it seems that more effort needs to be focused on calendar spreads and inter-city spreads.  I’ve tried to encourage such trading with X16/X16 calendar spreads and Intercity spreads across the X17 contracts, but those are all within two years of expiration.

That said, I’m heartened to see some outright interest in the HCIX18 contract.  I’d encourage others (and will help) to use recent tightness in the HCIX18 bid/ask spread to contribute X16/X18 and X17/X18 calendar spread quotes, as well as X18 IC spread orders.

If you have any questions, please feel free to contact me (johnhdolan@homepricefutures.com) to discuss any such ideas.