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

Churning a Friday the 13th

Happy Friday the 13th! Here's a few observations from the last week of trade. 

Over the past few sessions the White Pak in the EuroDollars has been on a tear. Since 01.05.12 they have bolting higher. The most obvious correlation has been the recent down ticking in LIBOR, which has moved from .58250% to its current level of .56700%. {a net change of -.0155} After relentlessly charging higher {or grinding to a halt only to uptick again} it has been steadily reversing. Helped by relatively positive auctions in Spain and Italy, the big boy banks have been easing a bit and thus we've downticked. However, with the rumored downgrades of Austria and France today, the EuroDollar futures have pulled off of the uber highs and are sitting still, just a touch below last night’s settles {future's prices}.

It is interesting to note a few highs/lows:

• Though LIBOR is currently printing only .567% the White Pak had an implied rate of .480% early Friday morning.
• Post downgrade rumors, they had repriced to ~.550% much closer to the .567% LIBOR print.
• The curve began to flatten again today with the back months steadily gaining in price.

Trades to have on:

We're currently keeping it pretty tight. Day trading the front quarterly spreads in the ED as well as some of the more stable 1x2 butterflies. 

• We have a core position of short the June/Sept/Dec butterfly in the ED's. We initiated this at a price of 1.5 ticks. It has been as low as .5 and briefly traded 2.
• We think that some of the 2013-2014-2015 1 year butterflies are starting to look really attractive. On a daily chart, many are breaching their 2 standard deviation levels {Bollinger bands}We're looking to establish a few longs in this area.
• We are currently long Green March 9912.5 {2014} straddles in the EuroDollar.
• Our Fed Funds book is currently long spreads, though in terms of size, we're on the lighter side of things.

Euro Currency {courtesy of PrD}

An interesting trade to look at is long the Euro FX.  Yeah, yeah, I know Europe is burning, and the Euro is surely headed for $1.20 at the very least and perhaps even par.  Well, guess what the crowd is thinking the same thing as net long positions declined by 24% over the past week, while net short positions increased by 29% in the same period, leaving the long to short ratio at 1.06, or roughly 51% long.  This is a HUGE shift in sentiment, warranted or not, when a trade gets too one sided, we all know what comes next, think of gold and silver in the fall.

Look at oil in the last week, everyone was long because they just knew that sanctions were going to be imposed on Iran and this would drive the cost WAY up, maybe as high as $150. Cooler heads prevailed and the market tanked $5 in two trading sessions.  This is what happens when the crowd thinks they are holding a sure thing and are going to get something for nothing.  Ever notice that the more hysterical the market gets the more people climb on board, throwing all caution to the wind and buy higher and higher prices, or vice versa?  

My question for all those piling into a short Euro trade right now is, where were was you in October when the Euro was at $1.40?  Wouldn’t it have made a lot more sense to get short then?  That play would have required a little forethought and time spent in research.  In my opinion, the Euro began its decline over 3 months ago because the smart investors did their due diligence and bet accordingly. 

The fact is this; the ECB just gave European banks the lifeline they desperately needed with the LTRO, almost 500 billion Euros for 3 years at 1%.  Accordingly, the basis rate swap has headed south as it should.  This development should signal that one should be closing out short positions, not adding to them.  There is a great possibility of a MASSIVE short squeeze.   Such a move could launch the Euro back up to $1.35 or higher.  For this reason, I recommend scooping up a lottery ticket to fade the herd mentality.  The March $1.35 call can be purchased for 30 pips, or $375 bucks per one lot, with over 50 days to expiration, this is a trade you can’t afford to not take.  If it doesn’t work out, no big deal, but I would imagine an outright short Euro position is going to expose your account to a much bigger loss than $375.  Happy hunting!

Enjoy the long weekend with people that matter

~LH

2012 Predicitions

Everybody is doing it these days, why not throw my hat into the ring. Besides, its always fun to be ridiculously wrong and subsequently mocked.

I'll focus on the areas where we actually trade, work, and enjoy.

Left Hash's Calls for 2012

Fed Funds: 

I think Ben and his gang have sufficiently squashed any hope of a rate hike for all of 2012. Their language at the last FOMC meeting even hinted at further QE, which in my opinion, is an even bigger mess than the one he's trying to solve. The funds rates have been settling around 7-9 bps for a while now and though the market and its participants don't really like this level, I don't foresee it moving more than 4-5 bps {and the only direction is lower}. I am comfortable selling the 1 year 87-93 strangle strip at 39.5 {1.5.12 settlement prices + some modeled data}. Any premium collected with cover you in the rare event that we actually move. Additionally, I believe that our model will create a lot more opportunities to trade if we do head lower and spreads start expanding. I firmly believe, a settle outside of that strangle has about a 15 delta. 

ED: 

I don't believe LIBOR will stay here for the year. I believe that the European banking/sovereign debt crisis has 'mostly' blown over and we'll begin to see a return to cheaper money. If Ben and company do initiate some type of QE3, I don't think its out of the realm of possibilities to see the 97 line come back into play across the whites. However, I would wager that for the most part, you'll see LIBOR average around 40-45 bps for the year with an occasional dip down into the 50-55 range. I would buy put spreads to take advantage of extremely rich put skew and to hedge some of the event exposure {9925-9900 or similar}Buying calls on the grind higher also would be prudent, as they somehow 'decay' on an uptick in the futures. It will be interesting to see if the Fed Funds vs Eurodollar correlation comes back into line as 2013 {and raising rates} looms. 

SPX: 

I don't really trade equity futures except to speculate. My one year target is 1405. The range will be 1080-1465. Drifting lower at the end of Q1 will bring about some type of QE3 and rally the equities into the 1400 range. A long grind for the summer months, followed by a slight pull back into year's end for a gorgeous print of 1405. Buy ES puts when the VIX is below 20, sell everything you can if it spikes above 40. 

Yield Curve: 

The Tens will print 1.50% and the Bond will touch 2.40% and because neither is good for anyone but giant banks, they will snap back and settle at 2.25% and 3.50%. The locals still have the front skews to the calls {implying that in the near term, the traders feel we'll trend higher and therefor pay a premium for that protection versus the puts} However, if you look 6 months out that trend levels out and 9 months out, it has actually shifted towards the puts {implying lower price and higher yields}. I wouldn't be afraid to buy puts and sell calls up to 3 months out. 

Gold: 

 Currently $1600 

2012's high: $1872 

2012's low: $1344 

 Settle: $1440 

Crude: 

Currently $101 

2012's high: $114 

 2012's low: $82 

Settle: $88 

 EuroCurrency: 

Currently $1.2725 

2012's high: $1.3630 

2012's low: $1.2200 

Settle: $1.3150 ______________________________________________________________________ 

Never to be out done, my colleague, Mr. PrD {Philosophical Rail Defender} has offered a quick glimpse at what he believes will be our 2012. 

Mr. PrD's Calls for 2012 

Overall, I think 2012 will have a periods of reflationary hopes, dashed by deflationary fears, much like 2011. Much will be dependent upon further increases in central bank balance sheets. However, I predict that the half-life of any such increases will be increasingly shorter and shorter. My advice for the year is not marry any one idea, keep an open mind (don't fall into the trap of extreme sentiment accompanied with herd psychology), and understand that we live in exponential times. 

That being said, the predictions are: 
S&P 
High:1320-1350 
 Low: 950-980 

Oil 
High:110-112 
Low: 65-68 

Gold 
High:1850 
Low:1400 

30 Year yields 
High: 3.75 
Low: 2.40 

Euro currency 
High: 1.3400 
Low: 1.1800 

Hope we all make a ton of money this year. 

~LH

Reviewing a week

It took me awhile to figure out why manufactures insisted on putting cameras on cell phones. Finally, it has come to me. They did it so that we can take pictures of white boards and be able to disseminate the information at a later date and time.

So here's a whiteboard shot of our calls for the week we just exited:

 The Red column is our agreed upon guess for the week's low and the Blue was our week's high. The small black numbers are the actual prices.

For those of you scoring at home, I created the little matrix below to help with understanding my chicken scratch.

Not a bad week, and though it is completely contrary to my nature, we would have fared pretty well as premium sellers {strangles or outrights}.

From an email with Mr. Practical Thinker:

"... I'm pretty impressed with our calls. I think it's safe to say we accidentally nailed the dual mindset of last week. There was the 'all-clear' knee jerk reaction which got us within $1 of the high of crude, 1 penny of the high in ECM, etc. AND then the lows which came off the 'drip, drip, drip' reality of second thoughts. Which reality will win mind share in the week ahead? Not a very positive lead for the former but the market sure is comprised of the optimistic sort. We shall see...."

He's right, the market is optimistic. They {the ominous marketeers}seem to have grown accustomed to shaking off the brutal headlines and forging forward. It will be interesting to see what happens IF the market ever has real buyer's remorse on the whole thing. You wont see a 1000 point drop in a few moments, but I would say that you'd see a 1500 point drop over 8-10 trading sessions! Like I have said previously, I would love to be long gamma!

~LH

Updating the MGC (Monday Great Calls)

Here's the update going into the PPI data tomorrow and Friday's CPI.

1. Closed out the UL vs TY spread at 120.21 and 117.205. This trade netted 1007 ticks ($31.468.75). In its place we've intiated a very basic NOB. Re-initiating, with the US 63 @ 116.27 and sold the TY -100 @ 117.205
2. Buy premium, the VIX is too low. (See SPU section #6)
3. Hold on Euro FX positions
4. Look to sell the AUD over .9050
5. Currently Long this U vs U spread and looking to sell 31s
6. Purchase the 1095 SPX straddle for 12.40. Look to hedge below 1085 and above 1115
7. Neutral. Flat CL after getting to the expected target.

 My gut says that the PPI & CPI data (Bloomberg Calendar) will be a complete duds and the overall market will slowly drift towards unchanged for the week.

LH

Monday Mornings are for Great Calls

Here's my play book for the week ahead. We're actually closed Monday so it will give you a bit of extra time to digest what you'd do with these.

Plays for the week:

1. Using the new Ultra Long Bond (UB), I would like to put on a BOB (UB vs US) vs a NOB (US vs TY). Broken down, the US portion actually cancles itself out and what you're left with is a Long UB position vs. a Short TY position. Here's the ratio used: +28 @ 121.25 UL and -130 @ 118.04 TY
2. The VIX is simply too high (currently 24.05). Expect the VIX to settle around 22.5 on 2/19/10
3. Euro Currency. The previous week has been a roller coaster and there is little doubt this will continue. It should stay between 1.3350 and 1.3850 as long as the Greeks keep up their end of the bargain (currently 1.3590).
4. The AUD is the personal favorite risk currency of my associate Practical Thinker (Mr. PT for short) and his call for this week is to remain between .8750 to .9050 (currently about .8840)
5. Expect the Eurodollar vs Fed Fund Sept 2010 ratio to remain in a very tight range of 31 to 32, buying dips and selling spikes (currently 31)
6. Expect the SPU to hang tight inbetween 1050 and 1090. However, a violation of the 1095 line will mean higher highs (currently 1073)
7. Finally, the Old Baron in our office has proclaimed that oil (CLH10) is a screaming buy and will settle on 2/19 right around 77.50. (it is ~$74)

This is the playbook. If this week somehow produces a market moving catalyst the play will be cover or take profits sooner than Friday. I don't anticipate any of these positions lasting for more than a week. My gut says the world is just a touch to dynamic.