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

Possible Plays and an Update

What's worth doing right now?

We've sat around for a couple of days scratching our heads over what should be done in order to best capitalize on our current environment. If you'll recall, the last posting on what we're trading {here}we talked about a long July put spread in the bonds and a long call 1x2 in the September EuroDollar Futures.

To be brutally honest, we've taken some heat on both. 

Bonds:

As we traded higher following the rapid decrease in the S&P the bond option volatility became jacked! Though it wasn't enough to offset the 3 point rally we suffered with a short 5 delta, it did lessen the blow and provide us an opportunity to roll it around. In order to capitalize on the sudden rise in volatility we executed the July 114 - 115 put spread 1x2. By buying one July 115 put and selling 2 July 114 puts we effectively traded into the July 114 -117 put spread 1x2. This offers us the chance to make a profit anywhere between 117 and 111 in the September bond future. It also creates a short vega position meaning that as the market calms down and volatility decreases, this position will gain in value. Our average cost for the trade is now 9 total ticks.

Euro Dollars:

Our 95-96 call 1x2 is a bit underwater. We initially paid 3 ticks on that trade and as of the close today it was quoted 1.5-2. I firmly believe that this is the correct play and would advocate adding to any longs you've accumulated. This European drama will end and you have plenty of time to have the Libor stay put or slightly retrace.

The Future:

The skew {combo/risk reversal} in the bonds right now is very well bid to the calls. {The combo is usually constructed by equal-distant calls and puts. Price is derived by subtracting the less expensive from the more expensive. 9.5 out of 10 times the PUT is more expensive than the CALL} In the September options {expiration 8.27.10}the premium is +8 ticks to the call. This is the fear trade. Right now, locals {and paper}are scared that the bonds will make a dramatic run-up just as they did back in November of 2008. To capitalize on this, you should look at the September 104 - 108 put spread 1x2. Currently it is priced around 2 ticks with the premium going to the 108 line. This means that you can sell it for 2 ticks and be long 1 extra downside put. Here is my thinking. 

*If the market continues on it merry way and continues it assault on sub 4% long term rates, this trade will expire worthless and you'll keep your 2 ticks of profit.

*If the market makes a powerful correction in the next 95 trading days there will be a change in the combo. Locals and paper will realize that the puts are undervalued and that skew could flip as much as 12-16 ticks. When that happens, this trade will profit handsomely as you're actually long an extra put for just such an occasion.

*If the market screams lower, you do have exposure between a futures price of 108 and 100 in the September future. Just for reference, those prices represent a 30 year bond yielding more than 7 %.

~LH