ES-RISK Spread Compression Unwind Threshold Reached

Tyler Durden's picture

No point in getting too greedy: after the latest spread compression opportunity was presented courtesy of yesterday's late afternoon ramp on speculation of a debt deal, breaking the ES-RISK correlation, and taking it to a 12 point spread, it has since contracted to a nearly negligible 4 points as of last check. The only thing better than free money from a 100% spread closure is 66% spread closure.At $50 per ES contract pt (coupled with a comparable DV01 match on the synthetic RISK side) this is $450 profit (on only ~$5k margin), or around 9% return in one day. We'll take it. Spread entry/exit points provided as usual by Capital Context.

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Stoploss's picture

Is this ten or eleven? I lost count.

oblonsky's picture

why not just make the 10 a little louder?

No Bid's picture

but it's 11, which is more than 10.  so it's louder.

LudwigVon's picture

It was, however, a suggestion worth weighing.

Cognitive Dissonance's picture

Was that as good for you as it was for me?

Lie to me if it wasn't.

Helena Bonham-Carter's picture

66% is threescore and ten million afoot with me. A plague upon my pips when thieves cannot be true one to another!

legal eagle's picture

I so wish I understood what you ate saying. Can someone distll thin into plain English?

d00daa's picture

it's a compression trade, taking advantage in the divergence between es/risk.  short es, long risk, the divergence "compresses," and you make money on both sides of the trade.  as tyler said, free money, 100% success rate.

speconomist's picture

I only have an account with a forex broker.


I know that on one side I can go long AUD/JPY and EUR/JPY, but ...

do you have any idea how could I short the ES? I mean, is there any currency pair highly correlated to the index?

andrew123's picture

What does going long "risk" entail?

TempFlashback's picture

The "risk" basket, aka the white line in the chart above, is synthetically comprised of the 10y curve butterfly, EURUSD, AUDJPY, Crude and Gold. While this is not a direct answer to your question, I think this may be what you are trying to find out.


FUN160's picture

It's fairly rare to make money on both sides of a spread trade.

But that's the beauty of a spread. You don't care about the general level of the market when covergence occurs, you just care the convergence.

Trading is a lot easier when you have this kind of deep edge.

Eric Cartman's picture

Nobody truely understands it. If they say they do, they're lying. 

d00daa's picture

it is really not that complicated a concept at all.  you're trading a collapsing divergence.  what may be complicated for some traders is effectively re-creating the risk basket synthetically.

Stoploss's picture


No explanation from me though. I will offer a heads up when i see it.

andrew123's picture

We get the es part.  What are you buying when you buy "risk"?

mynhair's picture

I use AGQ/ZSL and TNA/TZA most of the time.

Stoploss's picture

You don't buy "risk", you bet with it, or against it. Risk is the spread itself.

Not trying to be an ass, but the last time i let the cat out of the bag, 2 days later the trade went away, so im gun shy with this one.

It is very easy to spot and can be done even on a laptop or cell phone. I have lots of hardware/software, but for this trade it is not needed.

Open to suggestion for ideas, but every one watches everything, so as soon as i lay it out for the world to see, it's going to be gone. I don't want that.

long-shorty's picture

"Nobody truely understands it. If they say they do, they're lying."

BING BING BING; we have a winner.

(OK, I understand that there are allegedly six components to this risk basket, but how much of each one would need to trade to properly compose the basket or the trade, I have no idea. Maybe we have to purchase the services of the company Tyler is linking us to here.

If Tyler really loved us, he would share how to make this basket on our Bloombergs, and then we could give a portion of our winnings back to the site. Shorting the ES yesterday at 1318 or so without going long the risk half of the basket wouldn't have been worth anything.)

Goofy Bastard's picture

Has State Street made an ETF of this yet?

SheepDog-One's picture

And people say Tyler never points out trades. Thanks Tyler, enjoyed the easy money.

d00daa's picture

this is the only trade i recall tyler ever calling directly as long as i've been reading here.  lots of trolls around here like to say he's always calling for crashes, etc, "don't listen to zh, you won't make money," etc etc.

can't argue with a 100% track record.

ShankyS's picture

Can't say they have called it a trade, but they have been bullish gold since the beginning of time.

SheepDog-One's picture

He's called tons of these divergence trades.

baby_BLYTHE's picture

in other news,

Gold rallied nicely back above $1600, after that small correction.

If gold would have rallied yesterday, it would have broken the all time consecutive record of 11 straight days.

firstdivision's picture

I went with TZA/TYO pair...and at EOD both were up 0_o  Closed that one.

FUN160's picture

Do you understand that buying TZA and TYO as a "spread" is a Texas hedge?

bill1102inf's picture

just remember, if risk goes vertical, it will push es up too and when es comes back down to risk, it may be HIGHER than where you shorted it.

nonclaim's picture

If both legs are reasonably balanced, your long gain will cover the short loss and you'll still profit from the collapsing divergence.

andrew123's picture

What exactly is the "risk" side of the trade?

Arch Duke Ferdinand's picture

""Time to Abolish Congress and Replace It with Mass Internet Voting on the Issues"" ...

OT: Hilarious 2 Min Vid...

Cplus's picture


The HFT principals are preparing to bring high frequency trading to CDS and interest rate swaps.


What can possibly go wrong?

djcorbs's picture

Can someone actually explain what service or brokerage account an individual can setup to take advantage of this trade?

bill1102inf's picture

Stand on my porch for 3 days and then maybe we will talk.

swissinv's picture

I wonder if anyone has successfully traded the differential? Pls let us know!

Everybody pretends to be on the top of this topic but I bet only few really understand how this arbitrage model is exactly working. To be honest with you, I'm also not sure if my understanding is correct, but I provide herewith at least my input to start a constructive discussion (thus feel free to correct me or further elaborate).

First, it looks like that most users are just playing one side of the trade. They go long the S&P500 if the ESU is below the risk basket and go short if the ESU is above the risk basket. However, this one side play is not arbitrage and does certainly not guarantee any profits. Obviously, we also have to trade the risk basket to earn the spread.

The risk basket includes is a correlation mix of the following components: AUDJPY, EURJPY, Gold, Oil, 10Y TSY yield, 2s10s30s TSY butterfly spread, DXY, and 2Y US-EU swap spread. These components are derived from a multiple regression against the ESU (and the correlation coefficient change on a daily basis). Fortunately, we don't need to care about the math and the correlation coefficients are simply used to create a proxy for the S&P500 (the risk basket). Since there are too many components to exactly replicate risk trade/spread, we also don't need to know any weights or correlation coefficients.

What we have to understand it the "ETF Capital Structure Arb" concept of the founders (capital context) which involves the following ETF to arbitrage the spread: (SPDR S&P 500) (iShares iBoxx $ Investment Grade) (iShares Lehman 7-10 Year Treasuy)

I understand that the main driver for capital flows is the spread between corporate bonds and US treasuries. If the spread widens, money flows into corporate bond market. If the credit spread tightens, money flows out from bond market into equities. If there is any manipulation of interest rates or equity prices, the S&P500 is getting out of sync with the proxy index (risk basket) but the firms capital structure brings it back to equilibrium represented by the risk basket.

So I understand that if:

ESU > RISK: selling 4 units of SPY, selling 9 units of EIF and buying 12 units of LQD

ESU < RISK: buying 4 units of SPY, buying 9 units of EIF and selling 12 units of LQD

(ratio and weighting fits with duration differentials and empirical cycles and I assume they can be considered as constant)

There are other combinations of ETF depending on the time horizon of the trade. See:

speconomist's picture

I only have an account with a forex broker.


I know that on one side I can go long AUD/JPY and EUR/JPY, but ...

do you have any idea how could I short the ES? I mean, is there any currency pair highly correlated to the index?

FUN160's picture

You can short ES on Globex, short SPY, buy an S&P bear ETF...lots of ways to skin this cat, but it's gonna take more than a Forex account.

dcb's picture

I don't know if anyone trades uco, sco the two ultra crude long and short intraday, but for easy profits I suggeest this. Now I got caught up on my tbt because I bought so much at the near the close after taking profits, and some other things in there with treasuries, etc.

the move between what the two scurities do intra day is a good three percent or more. if you get a fraction of that 70 or so you are talking an easy two percent a day.

today the spread was more like four percent, and the action was insane. So I was pissed. But besides trading it on a longer term basis, I do this to add to my everyday return.


Anyone see what happened today. I'll bet there was rogue algo action. it was almost a mini crude flash crash (I'm using dramatic license, but WTF)

Cplus's picture


Without almost anyone knowing about it before today, even the professional energy traders, the big HFT companies have moved into the Energy swaps market and now account for one-third of all OTC energy swaps. It's only a matter of time before it becomes 85+% of the market. In combination with HFT arbing the cash market, you can count on some amazing Energy flash booms and busts to come . 

Try not to get caught on the wrong side or it will be a wipeout.



JJSF's picture

Thanks again.

danimal's picture

So now Tyler is saying only trade the ES-not the spread (only 5k of margin he mentions above)? On 7-19, when this diverged he said "Those who can recreate the RISK basket synthetically may wish to contiune the trend of profitable compression trades between reality and momo stupidity" So which is it? Or can the risk leg be traded w\ no margin? I think not.

So if you're just trading ES outright, this does at 1st glance appear to be a decent timing model. But 100% ??? No way. on 6-30 this was posted

I couldn't find the exit post for this trade and if done outright-short ES at 1315 you would'v hade to take up to 40 points of heat before break even arrived on 7-11 (ouch) and you would've missed other "compression trades" as well.

Can someone find the exit post for the 6-30 trade?? Was there one?

Also, the bid ask spread on the actual spread trade is around $135, and about $70 in comm. (assuming futes at $3.00 a side) and thats 4 es points right there. Thats w\ no slippage. And don't say you're gonna leg into something like this, way too many executions for that.

be cautious w\ outright trades- where is your stop? That will affect the p/l and track record of these postings.

Someone post the exit of the 6-30 trade please.



FUN160's picture

So if you're just trading ES outright, this does at 1st glance appear to be a decent timing model. But 100% ??? No way.

Only an idiot would trade just one side of this (or any) spread.

about $70 in comm. (assuming futes at $3.00 a side)

You need to find a new clearing house. That's about 50% more than I pay per side.