Spread-Trading

1. Introduction In spread trading, the central challenge is often not deciding what to trade, but executing the trade. A spread position requires simultaneous entry into two legs — buying one contract and selling another — and any failure to fill both legs at the intended prices exposes the trader to leg-out risk: an unwanted directional exposure on the unfilled leg. This article analyzes a price-level order management framework for spread execution. The approach is parameterized by fixed trigger prices for each direction, combined with time-based filtering and algorithmic lifecycle management. While simple in specification, the design reveals important principles about execution risk and state management in multi-leg trading. ...

1. Introduction Statistical arbitrage is a class of trading strategies that exploit temporary deviations from equilibrium relationships between correlated assets. The simplest and most widely practiced variant operates on the spread — the price difference (or a linear combination) of two cointegrated instruments — and bets on its reversion to a historical mean. This article examines a Bollinger Band–based mean reversion strategy applied to the spread. We develop the statistical foundations, formalize the trading logic, analyze parameter selection, and discuss the critical risk of non-reversion. ...