Inter Contract Charts

[Nick]

Hi,

I'm looking at inter contract spreads. I would have thought it best to chart the number of contracts at the ratio you intend to trade them, so the chart is a reflection of your equity - like a simple outright or calendar spread.

e.g 1x RBH17 - 1x CLH17

Researching the topic, I have learnt this isnt the way to do it. Apparently, as there are 42 gallons to a barrel, I need to multiply RB leg by 42. Maybe it's been a long day, but to me that means the chart would be as if I was trading 42 RB's to 1 CL?

If I work out the P&L of buying 1RB, selling 1 CL, as legs, and covering a few days later, it does indeed seem as if the RB leg should be multiplied by 42 to reflect the daily P&L of the spread, but I cant understand why! Charting the NYMEX traded RB-CL crack also shows the price is multiplied by 42. The Season Algo chart of RBH17-CLH17 also shows the same pricing as if the RB leg is multiplied by 42.

So my question is: why should we chart contracts of different tick values at ratios that are different to that which they are traded? I'd be grateful for any insight. Probably something really obvious!...

Thanks

Nick

[Roman]

Hi Nick, please read this article:

https://www.seasonalgo.com/crack-spread

and help page in Analyze => Builder where spread definitions are explained. For inter spread, you have two choices how to calculate them:

1) Equity spread - you multiply all legs by their point value, then spread point value is 1$. This is the safest choice, as you can't go wrong. You can of course use number of contracts to hedge legs.
https://www.seasonalgo.com/system/multi ... 01-16/5/1Y

2) Conversion - you can bring all legs to the same base value. For example your rb-cl spread, Crude oil is quoted in dollars per barrel, but gasoline in dollars per gallon and must be multiplied by 42 gallons per barrel to convert to dollars per barrel.
https://www.seasonalgo.com/system/multi ... 01-16/5/1Y
Now spread point value is 1000$.

Trading result of both spreads is the same. It's rather matter of what is industry used to. I suggest you to calculate all spreads as equity.