Where the Summer Went

It's been a long time since I got around to writing. It's not that I've not wanted too...simply put, I haven't had the desire for a strange set of circumstances.

In terms of an update, here is a quick recap of the last few months.

• The spring was pretty steady. We were running two sizable books with a decent amount of PnL. Our Fed Funds book was like a constant rockstar and my partner was doing a better than average job at moving inventory and locking in profits on a daily basis. Unfortunately, my Eurodollar strategy was becoming more and more sporatic. In an effort to grow PnL's, I began trading some of the front flies on a mean reversion basis but this meant assuming more risks. Though I wound up taking in some profits, it wasn't an easy trade and some of the geopolitical aspects burned me for substantial losses.
• We take profits once a quarter, as June wrapped up, we were less than gangbusters on the P side. Summer is usually a slower time in the interest rate complex. Most of NYC goes to the Hamptons and turns off the markets with the lights as they leave. On a personal note, my wife and I were expecting a baby in early July and I was looking forward to taking some time off. 
• The summer took an unexpected twist when my partner asked to dissolve our partnership on July 23rd. He wasn't comfortable with the risk of the Eurodollar book and wasn't pleased with the return on my half of the partnership. In fairness, he was shouldering a majority of the profits so I can't say that I completely blame his decision. However, that meant a couple of things.  
• I would need to decided what to trade. If that was going to be Eurodollars...then steady as she goes. But if I wanted to go back to Fed funds, or options or yield curve or ANYTHING else, I needed to clear off a pretty sizable position that stretched out to 2017.  
• Was I going stay where I'd been for the last 30+ months, in the same office as a former partner?
• In some ways, I took a cop out on deciding what to do. I hit the eject button on a majority of my Eurodollar book. I think it cost me about 20K to simply liquidate it at the market. In hindsight, a very nice move...it cleared my head and I was able to move forward. I stepped back into the Fed Funds and began to trade it but with a new caveat. I left it intentionally small as I began the quest to do something new.

Ultimately, I reached the conclusion that it was time to pack up and leave. I needed a fresh start, new office and some change. The quest to find a suitable landing spot actually proved remarkably difficult. But I'm here...fully set up and running at roughly 50% capacity. Over the next few weeks, I plan on ramping up fully and I'll get back into the habit of writing weekly. I have nothing else to do since I'm now all alone in a 7'x15' box with a couple of windows. That story is next time.

Special thanks to @GeneratingAlpha for forcing me to write again. I appreciate the nudge and I'll get back to it.

~LH

Through 2/3 of a Q

Apparently, it wasn't my week off and I was actually responsible for getting a post or two out there. I have one ready to go, but its just a random trading story and to be honest, it still needs work. So, while I work on that, chew on this and some of our current trades.

Euro Dollars: 

Green March {'14} 9912.5 straddles:

We've continued to scalp the gamma as we've moved around. Our best sale to date was 9936.5 and on Friday we were able to buy in 9912s directly on the number. As the futures have traded lower, we've dumped all of our puts associated with the straddle for deltas. Average sale on those puts has been around 4 ticks. Currently our position is carrying an 80% short delta vs our remaining calls. This has been a laborious trade and would have been significantly better had we executed a few days later with the 9925 straddle instead of the 9912.5.

April 9950 straddles vs June 9937.5 puts:

We do this trade once a quarter, selling the April straddle to buy the June puts. The risk is that LIBOR explodes higher as we're naked short upside. Historically we collect between 5 and 7 ticks to put this trade on and usually get out when it drifts towards even money. However, as we put it on this time, LIBOR exploded higher. Specifically, the June contract rose quicker than we had anticipated and we took a fair amount of heat on the position. Thankfully, it has come back some, though this too looks to be a difficult trade going forward. Eerily similar to the Green Straddles.

Sept 9925/9950 put spreads:

As our June spreads get further out of the money {01.19.12} we've been actively looking for another insurance bet that allows us to trade some of our other products more aggressively. We settled on the Sept put spread for a couple of reasons that you've heard before. If we rip lower, it pays out 25 ticks, its pretty cheap 3.5 - 4.5, the decay on this spread is very small relavitve to the time frame. We've purchased this as our lotto ticket just in case any of these European Nations get froggy or PIIGiSh. Our average buy was 3.5 ticks vs Sept futures at 9955.

Longer term look outs:

• Really want to see the March '13-'14-'15 one year fly drift down towards -35. Don't necessarily want to be short here, but we'll be looking to accumulate a long position as we head down.
• Likewise with the Dec '13-'14-'15 one year fly, we feel that it is a short anywhere about -17.
• There seems to be a slight disconnect between what the Fed has been saying about the Fed Funds rate and where a couple of large players {presumably Brevan Howard} have been trading the futures. The current mandate is that there will be no change until mid 2014, however, starting in June 2013 and heading back there is a consistent trend of higher than average spreads. If the Fed doesn't move rates, through this period, there is a great opportunity to collect 'free money' by selling the June '13 at 9976.5 and buying the Jan '14 at 9963.5. You effectively "sell" each one month spread at 2 ticks if you look back to the front of the curve, these have all been exit-able around 0-.5 {some have traded as low as -1}. Not really advocating launching such spreads, BH isn't usually wrong. Just noting that there's a disconnect. Unfortunately, the locals in the FF's option pit wont make option markets out that far. So its futures or nothing.

Hope it helps. Fight the good fight.

~LH

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

One down 11 to go

January is almost in the books. Can't say that it was a horrible month, though the trade has been slightly less than amazing. The most salient point to take out of the month was Ben Bernanke's latest round of QE2.5 {term stolen from Bill Gross}

The idea that we're not going to get any movement until late 2014 is disconcerting to say the least. Spread percentages are currently priced in the low to mid teens all the way out through 2013 though, early last week some of the fourth quarter spreads were implying the chance of a 25 bps raise at about 25-30%.

Ultra low rates mean that banks will continue to make shadow profits, burden the public sector with their toxins if need be, and nurse patiently on the teat of the federal government.

Trades:
We've kept out March 9912.5 straddle on in the Eurodollars. We've adjusted for delta and we're currently short 70% of our futures from an average price around 24.5. This might seem low, considering that we are printing 9932.5 as I type, but this is just how the gamma game works. The last few deltas will probably be MOC {market on close} near the end of the contract's life {especially if we don't see a pull back into the low 20s}.

Our June put spread is still intact. We have made no adjustments as of yet. However, if we see a sustained rally above 9955-56, we will be looking to roll the strikes up for a minimal cost.

One year butterflies continue to print in the lowest ranges seen in many years. That fact, in correlation with the Green futures {March '14 - Dec'14} being at historical highs leads us to believe there are some unique trading opportunities out there for those willing to take a bit of risk. Both the Sept '13-'15 and the Dec '13-'15 flies have a zscore of -2.5 of more {implying they are more than 2 standard deviations away from their 200 day moving average}. Granted, this might be the result the newest disclosure that the Fed will most likely be on hold through 2014, but if you're willing to stomach a bit of pain {or maybe lock it in for 6-12 months} these trades may provide the return you're looking for.

~LH

Open Positions

Currently, we have on a few positions that I'd like to note as some are now gaining traction and others are languishing in the depths

All in the EuroDollar Complex: {#GE_f}

9912.5 Straddle in March 2014

• Last post I mentioned that we were long the green March {2014} 9912.5 straddle. We originally initiated this trade when it was very close to ATM {vs. 9913.5}. Our thought process was that we might be able to get a run up, or down, in the greens and we would then have a chance to scalp the gamma. As it turned out, we bounced up to 9927 and as a result, we sold deltas the entire way up. Now the greens are starting to pull back while the euphoria of a stalling 3-month LIBOR is beginning to wain and it's time to do an inventory of where we're at:
• Hedges: We sold deltas at 14, 16, 19.5, 22, and 24 {equally} for an average short of ~9919
• As we approach that level again, we'll be looking to buy back some of these higher sales and to subsequently place GTC's to the upside.

 9900-9937.5 Put Spread in June 2012

• We bought this purely as an insurance policy against Europe. Our entry level was 3.5 ticks vs 9948 in the June '12 futures. Locals had a 22 delta on it at the time of execution.
• Our thought process was two fold: Cheap-ish price for a 10:1 payout and we've noticed that as the time passes and/or we drift higher, this type of structure actually ages very well {code for it doesn't lose its value instantly}
• Since we're using this as a macro hedge to our book, we didn't execute any deltas vs 9948. Our first buy will be ~9943.5 but, we intend on keeping it significantly under hedged so as to fully capture any type of front-end credit event. {Greeks missing their end of March bond payment?}

 Just a peak at what we like. I think you're able to still execute both of these strategies relatively close to the our levels if you're so inclined. Obviously, we have others and my hope is to write about a few of our futures plays tomorrow.

A bit of housekeeping. The Philosophical Rail Defender has requested a name change. I guess that since he's no longer on the floor, it no longer makes sense to think of him on the rail...who knew? At any rate, I've added him as an author on here under the acronym EDUB. Maybe it sticks.

~LH