Postitions

As usual the inventory continues to roll around and as always the hope is that this rolling comes laden with fat P and tiny L.

Fly update:
Sold entire core position of Dec '12 - '13 -'14 butterflies at an average price of -29, locking in a little better than 6 ticks of profit. Since that time, we've started to reaccumulate a small position AS LONG AS we're able to sell the Dec '13 - '14 -'15 fly as a package {1:1} for the price of -14 or better {eg buying -31's to sell -17's}. As I write this, that double fly is trading around -11.

Front Spreads:
We've completely rolled out of the March contract and unless something crazy happens {eg I get antsy and buy front month gamma} we don't anticipate getting back in. We're working to buy the June/Sept/Dec '12 fly for -1 or better. From our charting, it seems to have been tracking in fairly tight channel and buying -1s with the goal to add more at -2 fits our risk parameters. We'll have a soft-stop at -3.5 with an anticipated exit of positive 2.

Straddles:
As always, we continue to flip gamma around the March '14 9912.5 straddle that we're long. We will be looking for an opportunity to roll this to Green June shortly. Currently, we're short 30% of our deltas vs. 9918.

Put Spreads:
We've continued to hold our unhedged 91-93 put spread in June '12. Though it is under levels where we initially put it on, we have added to the position and it continues to be our 'insurance policy' in the event that all hell breaks loose around the Mediterranean Sea.

Outright Puts in the Fed Funds:
Interesting to note that within the last few days, a couple of major players have resurfaced looking to purchase downside protection. I mention this for a couple of reasons.

1. The Fed has proclaimed that they will not be moving rates until 'the latter part of 2014'. This is intriguing because the protection they're buying is for Feb of 2012.
2. The two firms doing the majority of the buying are JPM and Fimat. I can't speak with any definite authority as to who is behind these mega-houses, however in the past, Brevan Howard has always come through Fimat in the Fed Funds. He's been right more times than not and has fleeced the locals in that option pit countless times. Maybe he's back?
3. In our opinion, this is the type of trade that blows out traders. We've all heard the rhetoric about when the Fed will finally be moving rates and under that assumption you can safely sell every 9975 put to lower and collect your daily decay. However, the Fed is dynamic, and it wasn't more that 7 weeks ago that we were all clamoring for QE3. Now that stimulus is a distant memory and the we're headed to a S&P 1400 print...what's to say that we the rates don't start to get froggy sooner? Like 18 months sooner? Just a thought.

Trading size is always more fun, but so is being able to sleep at night.

~LH

Couple of Quick Updates

Good days are quickly maligned by trading errors. Best to stick them in a hole and move on. Take your lesson or your lump and keep slinging. I guess that maybe, just maybe its a zero-sum game and one of these days I'm going to have the winning error of a lifetime. That being said, I have no intention of holding my breathe for that moment.

I want to write about just a few of the Eurodollar positions we have on and how we're managing them.

Currently we have an outright long position in the Dec '12 - '13 -'14 butterfly. We established the position from roughly -35.25 and though we've scalped some intraday {+/- a 4 tick move} we are holding our longs. Against it, as a micro-hedge, we're looking to sell the Dec '13 - 14 -'15 fly. Though we're NOT doing this trade one to one {therefore not establishing a true Eurodollar double fly 1 x -3 x 3 x -1} we are doing this to allow ourselves a chance to catch the fly contracts rolling through different periods and configurations. We expect the Z2/3/4 to appreciate and the Z3/4/5 to sell off based on our analysis of their trends vs the constant maturity charts.

The March - June spread has been a lot of fun to trade as of late. We hedged our short position by layering into the March - June - Sept butterfly at -3.5 and -4. That fly is currently trading -1 and we're now short from that level. This is not a home run type trade. Rather we're just trying to catch the fluctuations as it meanders through various price levels and back. Ideally, we hope to be completely out of this fly by the week's end {2/17/12}.

Finally, we've continued to buy back our short deltas versus the Green March 9912.5 straddle that we're long. We maintain a short delta position of 50% from a price of 9931. Our straddle is still roughly the same price we bought it at {18 vs 18.5}. Also, in order to buy more deltas in, we have sold 50% of the puts that comprised our straddle at a price of 4 ticks. This allowed us to lock in some profits, get long some deltas, and avoid the impending acceleration in the theta decay. We still have 75% of our original position and have resting GTC's to cover our remaining shorts as we approach the strike. Conversely, we have GTC sells out our recently purchased deltas.

Hopefully your day was error free and full of huge PnL.

~LH

Blowing up, not Blowing out

Back in June '11, after a few beers, I began to shoot my mouth off about my athletic prowess as a runner. Though I hadn't run since 8th grade cross country, I was sure that I could still do it and furthermore, proclaimed that I would be running at least a half {if not a full} marathon by the year's end.

First race I ran was September 11th and it was one of the Chicago's Half Marathons. I finished...though its not exactly clear how. At some point, dehydration, hypoglycemia, and sheer lack of training caught up with me. I staggered the last few meters to the finish, woke up in the ambulance to some EMTs asking me questions, passed out again to wake up in the ER, passed out demanding that they don't cut my shirt off or destroy my iPod, woke up and passed out again.

I had hit the the runner's Red Line and had pushed my body past its working zone. Suddenly I had a new respect for the running and the toll it can extract from your body if you're ill prepared or not properly conditioned. In a strange, quasi world, it reminded me of trading.

It was as if the race had become a metaphor of my trading. Maybe I staggered to the finish, but the results had been less than impressive. My time of 1:38 was nothing spectacular and my arrival at the ER was ultimately a kick in the shins. It was as if I had just been trading huge, slinging futures here and there until the weight of my own position caused me to puke. All traders that have longevity in this business seem to have an innate sense of when to hit the eject button on a loser. Strangely in a race, that eject button was the finish line, but to hit in an orderly fashion, would have required me to walk. In my mind Walking was the same as Puking a position. I wasn't willing to make that trade. The results are documented in my permanent medical history.

I've made the puke trade countless times. It never feels good during the vomiting session, but the relief shortly thereafter is always euphorically refreshing. I'm reminded of one of the few stories I can recall from my uncle Al before he passed away. After listening to any problem you might have had he'd calmly say, "It doesn't matter how many times you've fallen off the horse, it only matters how quickly you get back on." I attacked running with renewed vigor. I adjusted my methodology, changed my diet, trained differently...almost as if I had gone back to the desk, found the charts and worked a new strategy for the next time my positions went awry.

I don't share this to say that I've got it all figured out in either of these areas {running or trading}. But I will say that I continue to do both regardless of the beat downs. The goal for me isn't to just finish the race or exit the trade, it is to smash my personal best and to squeeze every last tick out of the winners. More running tales later on, but for now, back to the grind of the trading day.

~LH

Super Bowl

I had intended on getting this out on Saturday or even Sunday, but as usual, life got in the way. By life, I'm referring to a 2 hour trip to Costco, church, little people who want to wrestle, and 36 miles of running over a 36 hour span. Oh, then there was that part about the Super Bowl consuming ~4.5 hours of my life. By the time I actually got around to writing, my brain was fried and it was moved to today's agenda.

Friday was a fairly busy day. I don't really want to write about the legitimacy of the NFP data and whether you believe it or not. Rather, I'd prefer to focus on what happened in the products we watch and where we think the next few weeks will take us.

Let's talk Fed Funds. There was a noticeable volume spike heading in to the week's end. Where we are normally seeing 18-22K contracts a day, we suddenly saw a bounce up north of 50K. Obviously, customers wanted to move some of their inventory prior to the release on the Unemployment figures on Friday. On Thursday, prior to the data, a new customer came to buy 3000 of the July '12 -- Jan '13 future's spread. He started accumulating at a price 2 ticks and paid up to 2.5. We count spreads on an adjacent month basis. That is to say, that selling 100 N/F spreads actually resulted in selling 600 spreads {100 of each adjacent month NQ, QU, UV etc...}. At the time, 2s looked to be a decent sale. However, by the time the customer started lifting our 2.5s the trade no longer looked attractive as all the hedges has disappeared.

As the number hit the tape on Friday, the Funds sold off 1-2.5 ticks {which, if you're familiar with this product, is a substantial move}. Right on cue the customer was back to buy 1000 more spreads and though he was only 2.5 bid, we were sure that he'd need to step up and pay at least 3.5 in order to get filled. Hindsight trading says we should have unhitched the wagon and dumped every spread we had in our inventory at that moment. However, we didn't and within an hour or so, the Funds had rallied, the spreads had collapsed, that bid was long forgotten as the 1.5s began to trade in N/F. The turn had been subtle, but the force behind it showed that market participants still agreed that we're not going to see a Fed Funds rate change until 2014. We did well when viewing the traded for 50K feet, however, had we taken a more aggressive stance prior to Friday {which market participants did post-NFP} we would have locked in a great trade.

~LH