Mixing ED with US

Here's a couple of plays we have on going into Friday's unemployment number. For the record, I fully anticipate a blowout number. Something in the neighborhood of +275K with bottom-line rate unchanged at 9.7.

I say this for two reasons. We need good news for the equities. Other than traders, I don't think anyone likes fear. The VIX is high and the risk aversion is creeping back into the marketplace. If there was a month to finally release all the census workers' hiring data, this is it. April was free of strange weather events and random holidays that would have slowed the hiring process. We should see the full effects from the the 1 million jobs the census created {though we'll pay for them later} and it will make the Mom and Pop investor feel more confident after the likes of the Goldman Sachs scandal. Secondly, I'm not sure that the market will care what the number is, and are looking for any excuse to rally equities and sell treasuries. The panic flight to quality this morning was overdone IMO and regardless of what the US Government releases in terms of data, equities go higher yields do too. So, in a round-about way, I think we get there with a banging number or not.

Since we were so convinced that the Ten Year is going to reject the 3.50% yield line, we decided that we would execute a put spread in the bonds. We selected the July 115 - 117 put spread for 25 ticks. It has a 12 delta. We don't actually expect to keep this trade until expiration, rather as we grind lower, we hope to profit from its appreciation and sell it out. Below is the chart:

During a conversation with a large ED options trader, he noted a couple of plays that he thought would be decent risk/reward trades. However, his most salient trade thought was that he foresees the 99.625 line as a 'pin risk strike'. By that he simply means that we may trade up through it slightly but when it comes to settlement, LIBOR will settle as close to .375%  as possible and the options written to that line will become worthless {both the calls and puts would expire at zero} We really enjoyed this logic and decided to put some skin in the game and test it out.

We purchased the EDU 99.50 - 99.625 call spread 1x2 for 3 ticks. If our ED trader hypothesis is correct, our call 1x2 will settle at 12.5 ticks netting us 9.5 ticks {Sept ED settling at 99.625}. If LIBOR explodes and starts printing in the .75% to 1.25% range we simply lose our premium paid (in this case, 3 ticks). If the world settles down and risk becomes a moot point again, our breakeven to the upside is 99.72 in the September ED. That seems like an unlikely{though entirely possible} level, but one that we're still willing to take a risk on.

~LH