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Good Morning,
I am a relatively new trader learning how to trade spreads and would like to seek advice on calculating the spread ratios for the two legs of the spread. Should I be equalising the dollar notional values of the two legs or should I be looking at the respective ATRs and equalising them / equalising volatility?
Let's say I'm doing a spread between the 6E and the 6A futures contracts.
Methodology 1 (equalise notional dollar value)
6E: 1.2168 X 12.50 = 15.21
6A : 1.0320 X 10 = 10.32
Spread Ratio: 15.21 /10 = 1.52
Methodology 2
6E: 12.50 per tick
6A: 10 per tick
Spread Ratio: 12.50 / 10 = 1.25
Methodology 3: Based on ATR and volatility
6E : 60 period ATR based on 1 day timeframe= 0.0104
So 0.0104 X 12.50 = 1300
6A : 60 period ATR based on 1 day timeframe = 0.0089
So 0.0089 X 10 = 890
Spread ratio: 1300 / 890 = 1.46
I am unsure about which is the correct way to calculate the spread ratio. I would really appreciate advice on this.
I am a relatively new trader learning how to trade spreads and would like to seek advice on calculating the spread ratios for the two legs of the spread. Should I be equalising the dollar notional values of the two legs or should I be looking at the respective ATRs and equalising them / equalising volatility?
Let's say I'm doing a spread between the 6E and the 6A futures contracts.
Methodology 1 (equalise notional dollar value)
6E: 1.2168 X 12.50 = 15.21
6A : 1.0320 X 10 = 10.32
Spread Ratio: 15.21 /10 = 1.52
Methodology 2
6E: 12.50 per tick
6A: 10 per tick
Spread Ratio: 12.50 / 10 = 1.25
Methodology 3: Based on ATR and volatility
6E : 60 period ATR based on 1 day timeframe= 0.0104
So 0.0104 X 12.50 = 1300
6A : 60 period ATR based on 1 day timeframe = 0.0089
So 0.0089 X 10 = 890
Spread ratio: 1300 / 890 = 1.46
I am unsure about which is the correct way to calculate the spread ratio. I would really appreciate advice on this.