Silence wasn't golden

In some respects, I find it very difficult to write after getting pounded. At other times, it's actually a stress-relieving endorphin that allows me to refocus my thinking.

To be blunt, some of our assumptions of the QE2 announcement and the subsequent market follow-through were just wrong.

I do want to update some of our larger trades now that we've had a rally, a pull-back, and rolled plenty of our inventory.

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In the 30 yr bonds:

We sold out of our longs in the 137 calls prior to the QE announcement.

In the March Euro Dollar:

We rolled our March 9925-9950 put spread out to the June 9925-9950 put spread. We executed near the highs of the move for a cost of 1 tick. This will provide us with 3 more months to catch the credit event we still believe is looming.

In the March and May trees:

We have covered the March and we're in the process of covering the May. We originally put the on for a credit to the 1 leg and we're now selling them for even money. This helped us finance our ED put spreads and we are actively looking for ways to get some more premium shipped in, ideally in the FFs.

The NOB is still at 25 year highs. The range on Wednesday was almost 2 points. {that's 64 ticks at a price of $156 per one lot} Though it settled off the highs, it was up over a point. At this point, we have no position on as we attempt to reload and find a position that will allow us the capture what we think is the impending flattening.

~LH

Execution that hurts

Yesterday, on the 1.25 point sell off in the US {30 year} we decided to play the 'mean reversion' game and take a shot at getting long some upside calls.

We purchased the December {Z} 137 calls for 20 ticks. Our motiviation was as follows:

1. We are currently at the 60 day support level in the USZ {roughly 130}

2. We are anticipating a stock sell-off as well as the corresponding bond rally following next week's supposed QE2 announcement.

3. A trusted adviser taught me that when all else fails and you have no idea what to do, buy gamma.

{they're currently priced at 11-12}

Other things we've done or rolled out of.

1. We have taken 75% of our E0X 91-93 put spread off. We purchased it for 3.5 and have sold it for an average price of just under 5 ticks.

2. EDU v FFU, we purchased 28.5s in the spread and sold 31.5 and 32s {completely exiting the trade}

Finally, my Philosophical rail Defender alerted me to the following theory about the Nov 3rd announcement. Fascinating opinion. {this text comes directly from an IM conversation}

So here is my 10 delta prediction, {we'll get} no explicit announcement of QE, stocks tank, PIMPCO takes it on the chin and puts back {their long book of} MBS to Bank of America. The Govt does a Citi/GM style bailout with BAC. {As a result} Geithner gets ousted {and either} El Erian or Gross will move into the drivers seat at Treasury. They will then propose a bailout of state pensions via the Treasury issuing 100 year bonds at 6 pct in a swap for all pension assets. Then the Fed continues to stealthily purchase everything not nailed down.

~LH

Executing for the Why

I am enjoying my front row seat the the show this morning.

In the blue trunks, standing slightly shorter now, is Interest Rate Volatility. In the red trunks, growing more powerful by the second, is the 4 ton gorilla named market angst. I've got to be honest, with all the movement recently {albeit in one direction}, the impending QE2 scenarios, Bernanke's 3 point attack as outlined at Jackson Hole, and the every pundit in the world calling for a Bond Bubble {and subsequently a massive sell-off}I thought that IRV would put up a little better fight.

NOPE!

The pummeling is merciless and I'm starting to get squeamish watching this. One of our market brokers said, "This is the lowest I've ever seen Mid-Curve EuroDollar straddles {vol} in all of my years down here." That must be bad.

Interestingly enough, we're long this rapidly rotting volatility. The other day we purchased E0X92 straddles vs 9929 for an average price of 16.5. Our current hedging has left us short deltas from an average of 9934.5 at roughly 60% hedge ratio. However, our next sale isn't until 9947 and at least prior to the NFP number, our first buy is around 9921. Good luck Mr. Gamma.

~LH

Sizing up my opponent

Mid-September and I have plenty of irons in the fire. Yet the daily grind in the Fed Funds is slow and sometimes arduous.  The idea of growing our single accounts into a larger, more macro-focused trading vehicle has begun to effect my thoughts and the process by which I believe trade creation occurs. The Greek philosopher Heraclitus wrote, "Nothing endures but change." {We often hear it translated just a bit differently as, "Change is the only constant."} My newer approach is to pull back from the one tree from which I'm picking apples and take a look around me to see if there is any low-hanging fruit on another trees nearby. Why strain for the next marginal piece of fruit in my tree when there is a perfectly good piece of easy fruit on the tree right next to you? All that to say, I want to expand the book and create a greater exposure and presence markets that relate to the FF.

I've been at this long enough to know that most of my trades don't just appear out of nothing. A majority are created out of a calculated premise, a lengthy discussion and the intangible of experience. However, if we are to aim towards a more macro goal, I think the process can shift to a round table conversation where we answer the following questions:

1. Where do I think we're going tomorrow in the products that we trade?
2. What is the best trade for tomorrow?
3. What is the best trade for the next few weeks {3-6}?
4. What is the best trade for the quarter?

 I don't necessarily have the answers to any {all} of those questions at any given point, but collectively the answers will emerge. What I've described is the goal. How we actually go about getting to that point; well that's the adventure.

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I want to shift gears a bit and just briefly lay out some of the trades we've been working on over the last few weeks and months.

• In the FF we've been selling the 87/93 call spreads in December and February. We've been able to collect between .75 and 1 tick {1 tick = $41.67} and though they aren't "make your month" trades, they do help us finance our other positions.
• We've sold the March 68/75/81 put tree {-1, -1, +1} and collected an average of 1 tick. This trade leaves us short two downside puts and long one put that is currently ATM. If nothing happens in the Fed's policies or rates for the next few months OR we move higher in price {lower yields} we will simply collect our tick and be done with it. If however, we start to move lower, we're long a put spread with 1 naked short put below. The break even for this trade is roughly 9961.
• We've also done the May 68/75/81 put tree as describe above. However, we were able to collect an average of 2.75 ticks to sell the two legs and buy the one. The thought process and the theoretical payout is very similar.
• We have purchased the EDH {March 11} 92/95 {9925/9950} put spread in the Euro Dollars. Partially as a hedge against our FF put trees and partly to allow some credit risk exposure. Our thinking was if another European nation even hints at some type of sovereign wealth issue, the ED will react much more violently than the FF. We paid an average of 4.5 ticks {1 tick = $25}. The maximum this trade is worth is 25 ticks {less entry costs} giving us a very nice 5x1 on our money if it hits.

As far as what is out there but not quite ripe enough to pick? I think that the NOB is getting very attractive as a short position. The yield curve has been pricing in some type of QE2 coming out of tomorrow's FOMC meeting just as they did back in August. However, I find it difficult to believe that they will announce any type of easing coming out of an FOMC meeting. Perhaps they tweak the language, but nothing more. The chart below shows the generic NOB contract as generated by the CME. From its last top to the most recent bottom was nearly 80 ticks. At $156 per tick, that's a profit of ~$6,000 per one lot. I'm not sure how to best capture the pricing currently in the market. My gut says to get long USX {30 year Nov} put spreads and sell TYX put spreads for near zero cash outlay.

 ~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

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

Update

So there you have it. I guess it was sort of a push? I got 3 right, he got 3 right...but to be fair, my S&P call was pretty good too! However, since the X {November Fed Fund} market was technically Mr. Practical Thinker's, I assume that I owe lunch for the office.

~LH

"Failure is an orphan"

"...but Success has a thousand fathers."

I'd love to take the credit for calling out Wednesday's TY Note auction results and our two plays that netted 87.5% and 69% profits respectively {Highlighted in our last post}. I would love to be that guy, but alas...it was Mr. Practical Thinker.

Mr. Practical Thinker fathered the notion that the market would soundly reject a 4% yield in the TY. He was dead-nuts right. Looking into the Bloomberg article further we found a few points to be encouraging in terms of our pre-auction market analysis.

1. Indirect bidders {read: Foreign Banks} accounted for 8% more of the bids than they did in March. This is encouraging because we see this as a trade that has been initiated out of necessity. There seems to be  real risks in terms of the murky EU situation(s) and US economic recovery and the idea of locking up 50-100mm at close to 4% is a really nice hedge. 
2. The bid-to-cover ratio was 3.72 vs a rolling average of 2.87. Bloomberg cites that this was the most over-subscribed auction since at least 1994. Savvy investors of all backgrounds seemed to be able to identify how lucrative it was to get in on the nearly 4% yields.
3. "The Fed's preferred inflation measure, {Core PCE} an index based on consumer purchases of goods and services excluding food and energy, was up 1.3% in February from a year earlier, below the Fed's Target of 1.5% to 2%."* If treasury buyers are looking for a reason to get long, they have found it in the fact the real inflation is at generational lows. In our opinion, the fact that investors wont get your entire return gobbled up by inflation, coupled with the notion of nearly 4% yield brought additional buyers to the marketplace.

Here's what we're thinking. The $13 billion auction of 30 Year Bonds will be good, but NOT as good as the yesterday's TY. However, yields will drift lower as futures trade higher. We're looking for opportunities to buy TY and US put spreads as well as possibly cherry-picking some cheap volatility trades. Unfortunately, you will probably have to wait until mid-day on Friday {or maybe even Monday} to get the best levels on these trades. In the TY we suggest buying a put between 112 and 114 and financing it a put {or 2} lower than 110.5. For the US contract, we suggest buying a put between 113 and 110 and selling a lower strike.

~LH

*Wall Street Journal, "Fed Fear: Raising Rates Too Soon" by Hilsenrath 04.07.2010

Confucius say ...

"He who pick bottom, get stinky finger" (perhaps my favorite 'market timing' quote--obviously not Confucius)

Friday was a very abbreviated session that gave the credit markets a quick and solid beat down. Not only did every interest rate product move lower, but the spreads started moving as well (as opposed to the unilateral moves we've had recently)

To us, this signals a good sign. The marketplace is finally starting to price in a recovering US economy and all of the impending policy maneuvers that will accompany this revival.

Here's a few points of interest:

• As of the close yesterday, the Fed Fund Futures were pricing in a 43% chance of a 50 bps rate move at the January 2011 meeting. (Also known as an 86% chance of a 25 bps hike)
• Our closely watched NOB (Notes over Bonds) yield spread touched 86 bps on Friday. In the full session yesterday (Monday 4.05.10), it did NOT react as we had expected. Recently, when the short end (ED and 2 Yr Notes) sell off, the NOB goes negative (in relative terms, the 10's are underperforming in relationship to the 30's and the spread between their yields is increasing) Yesterday, even with a aggressive sell in the futures market, the NOB stayed constant at 88-89 bps. This signaled to us that the market wasn't fully convinced that yields were headed higher. Early price action today, confirms that assumption as they are drifting higher in early trade.
• General market consensus is that this week's auctions (all 8 of them ranging from 4 weeks to 30 years) will be met with mixed demand. Most talking heads have been harping on higher interest rates due to investors REQUIRING more bang for their buck. We disagree. Foreign investors were quiet at the last few rounds of auctions as they sifted out the mixture of data coming from the US. We anticipate very robust auctions and a drop in current yields (especially in the TY and US contracts).

We got long the following:

1. In the Ten Year (TY) we bought the 116.5 - 117.5 call spread for 8 ticks. Risk is 8 ticks, potential profit is 56 ticks (64-8). We're looking for a good TY auction on Wednesday and will probably be out around 14-16. {SOLD OUT AT 15 vs. 115.30 TYM10 Netting 87.5% profit}
2. In the 30 Yr Bond (US) we're long the 116-117 call spread for 13. Same parameters, just looking for a pop.{SOLD OUT AT 22 vs. 115.21 in USM10 Netting 69% profit}
3. We're still hedged up for a move to the downside in the Euro Dollar (ED). We still have the E0K 9837.5 - 9812.5 put spread 1x2 on for a half a tick. We're long the 9837.5s to be short 2X the 9812.5s. This trade pays off if the June 2011 ED settles below 9837.5 on May14th.
4. We took off the E0J put spread 1x2 for a 75% profit.

Closing thought:

• A large hedge fund in Greenwich CT. initiated a US 117 - 119 call spread 1x2 this morning. They bought the 117 calls and sold 2X 119 calls. They did 15K (15,000 x 30,000)! In my opinion, they have the same thoughts as us. The only difference is the timing (We put all of ours on yesterday) and size (We didn't do 15K)

This is the week of supply.

~LH

Excution Update

*Click the title.*

~LH

One play for today (3.31.10)

Haven't written in awhile and I feel naked. Let's open the playbook. Who has an idea to pitch me?

ANYONE?

• Bonds: I'm looking for a sharp down draft (lower prices, higher yields) on Friday's Unemployment data. Wednesday's ADP data was shocking to say the least. The market gurus were predicting an increase in hiring (not a loss) and are also whispering about a +200-250K job number this Friday. I don't think that +200K will happen (Bloomberg wants +181K), but it could and the 'Census Hiring' could be the determining factor. Due to the run up in Yield Curve Futures today we were able to buy the Ten Year 113.5-114.5 put spread in May for 7 ticks (TYK 13+/14+). (Updated: 4.2.10: The Unemployment Report broke us a bit lower. We looked at and discussed the possibilities of rolling it into a NOB. However, the yield spread between the 10's and 30's is not at a level we felt comfortable initiating. Therefore, we simply sold our entire position at 12 ticks. Netting 5 ticks of profit)
• You have 2 plays with this spread as we cruise lower. Sell it out and take your 4-5 ticks OR sell the May 112-113 put spread in the BONDS on a 100:-65 ratio (ie sell 65 Bond spreads per 100 Ten Years)
• Option 2 actually allows you to collect a small amount of premium and to effectively have an NOB (Notes over Bonds) yield spread play on. 

~LH

Quoting Pixar

Some weeks are harder than others. Last week was one of those weeks. Whether its the difficulties of a trending market or perhaps the pinch of repeatedly bad settlements it is with eager anticipation that I look forward to this new week. 

I desperately need to get Mr. Practical Thinker to write a piece or two on here. However, until he does, I will continue to poach his macro-mindedness and translate it into something we can all glean wisdom from. 

"You provide the food, I'll provide the perspective..."  (Anton Ego, Ratatoille)

This is not the first time I've stolen a line from Ratatoille (shameless plug: rent, borrow or buy this movie because its dialogue is supreme) and I hope broaden my "quotage" in the weeks to come but for now, you're stuck with the genius of Pixar. 

All this to say...the rumor-mongers and Mr. PT have done some adjusted my thinking by providing the perspective. If you've been following our execution you might have noticed that one trade we've gotten consistently right is our NOB (Notes Over Bonds) where we have sold the yield spread as it approached 100 basis points. On Friday, the spread between the two dipped to (and closed at) 89 bps and I desperately wanted to get long for the ride back up. 


The discussion was poignant and chalk full of salient information, but there were two quotes that I absolutely have to put on here. 

"I want to stay in a trade until it is blatantly obvious that I should have it on the other way"

 Two weeks ago, the NOB yield spread was trading 98bps and we sold it. If we (US) are really heading towards slightly higher short term rates and a better overall economic picture, one would expect a flattening yield curve. Why would we be in a hurry to tap out of at 90 or for that matter get long hoping to chop the last few basis points off of the giant's spear? Given where we believe the curve's rates are headed, we should have bet the farm at 98, looked to continue selling at 94, staying alert for any type of momentary blip while we continued to sell it until the 3 month low of 82 is taken out or we're so ultimately convinced that it is heading the other direction that we're forced to cover. Why would I give up on the right play? I think the answer lies within the Old Barron's wisdom of quote #2:

"It is so hard to stay long a winning trade, especially in this current trading climate."
That is so true. We're currently an office of grinders. We sit and grind through spread after spread, buying and selling both bids and offers while trying to not internalize to much of a position. Our ability to see the next tree and articulately describe it, inhibits our skill at seeing the actual forest. We are miss the global plays because we have our heads down and are furiously working at pounding out ticks. Though there is great wealth in "the grind," my guts says that the real money is in the being able to identify the trading climate you're headed towards and position yourself appropriately. Our tendency with winners is to close them out as soon as we've reached the maximum we were willing to lose. But trading isn't a bell-shaped curve. The best trades are great even if they retrace a bit and cause you to re-evaluate why you got into the position in the first place. Does the this particular trading strategy still hold water? If yes, you'll have to resist the temptation to close out and risk your chips a bit longer.


Needless to say, I didn't NOB it up. I'm actually flat. 


~LH

The Practical Thinker has escaped

He got away, even if it was just for a little bit....

Maybe next time, it will be me.
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1. The SPX's has rolled to June being the front contract. Roll down our strikes by about 4 pts. We still haven't executed a 2x3 or a combo but we're waiting in the weeds.
2. Gold has been angry...wait, just wait. 
3. The EuroCurrency has been strong all day paving the way for most major currencies against the Dollar. 
4. Rumor has it that Spain has a bit of a problem coming out soon...the currency market doesn't seem to buy the hype. Premium in the puts really took a beating today.
5. The NOB has come all the way back to 92 bps...we'll be waiting to reload
6. The long end of the yield never got low enough to sell any put spread
7. Our E0J put 1x2 was 5.5-6 on the break this morning on the Retail Sales data, but leveled back off settling around 4.5
8. Next week is very busy with Industrial Production, FOMC, LEI, Philly Fed, PPI and CPI. 
9. I fully expect the Fed to drop the 'extended period of time' language as four presidents have now openly criticized it. 
10. The Fed Funds cash market was 17-22 this morning even though the month's effective is only 15...just food for thought.
11. Next Friday is a quadruple witching with no numbers. Don't be absent. Something surprising always happens on no-number Fridays, especially when you have a lot of securities rolling off the books.

Enjoy the weekend: Mr. Practical Thinker is............
~LH

Play card: 03.09.10

What seems like a good play right now? Interestingly we've been a bit scattered on our picks, and though we've avoided a lot of trouble, it hasn't been easy.

If you'll recall:

• We were stopped out of our SPX play and covered all short deltas. We haven't bought any puts back in, but it is on the radar.
• We're long gold. Greed may have gotten the better of us as we got near the 1140 handle. In retrospect, it would have been prudent to place a stop around 1135. We didn't, and are still long. However, I've moved the stop up to 15 ticks 1110.{Stopped out 1110.50 on 03.10.10 we were off by 5 ticks!}
• Our U/U was brutally difficult to trade. After buying 24s and selling 27s a couple of time we were able to get the unit costs down to roughly 24.5 before getting flat at 28.
• The 'end-of-the-world' trade with FFJ vs EDH hasn't really paid off, though it is getting back to our levels and we would maintain a hold.

If you want to check on any of these click here.

Where does this quiet economic week send us? There are a few auctions in the yield curve however, the only piece of real data in my opinion is the retail sales number expected on Friday. Going forward, here where I'm focused.

• We're looking for a drift lower in the yield curve (though today's 3 year notes did fairly well at auction, drawing 1.437% with ~15% allotted at the high). If the long end (30 year) can below 115.28 we will be looking to sell 25 delta put spreads. Perhaps the 109-112 or the 110-113. 
• As the SPX continues to grind higher I can't help to get more and more bearish. However, after being stomped out of my last position I need to find a better way to express my opinions. Two plays come to mind: Short ratio called spreads and long cheap combos (risk reversals) 
• The J1175c-1200c call spread on a 2x3 ratio. You'll collect $7.35 (8.85 and 3.45 respectively) to sell the 1175 x2 and buy the 1200 x3. This provides you will a long premium play and a fat tail for protection.
• J1090p--J1190p is currently trading 3.60 to the put. That feels really cheap. I would look to be a buyer around $3.00
• The NOB spread is currently .98 bps. We sold the TY at 117.035 and bought the US at 116.17 on a 10:6.6 ratio {We reduced our exposure by 50% after netting 225 ticks, we plan on taking the balance off around 94 bps 3.10.10 UPDATED2: We traded completely out of this position buying 116.195 and selling 116.03}
• In the Eurodollar, I like being long high-octane put spreads. E0J 78-82 put 1x2 offers me that opportunity. It is priced off of the EDM11 (currently 9844.5). It costs 3.5 ticks and has about 6 weeks left. It break-even at 9821.5 and begins to lose money after 9784. This gives me 37.5 ticks to collect a profit.

 A few closing point lifted from my cohort in trading Mr. Practical Thinker:

1. Australian Unemployment is released tomorrow evening at 6:30 CST. This may finally be the catalyst that brings the AUD above .9225-.9250 and may provide an immediate term trade to get short looking for a retracement back to .8700

2. The chart here is of the SPX on a one week basis. Though it may be a bit difficult to read, it would appear to us that we have now ground through the free-fall area of October 2008. If we seriously get through 1148 which was the high set back in January, I would expect us to get up to 1175. From there, the next stop is near 1200-1225 (thus the 2x3). Failing to crack that 1148 level would potentially send us back down towards 1100 (thus the combos).

~LH

Punishment for the longs

Some of our long interest rate spreads are really taking it on the chin. Though it's frustrating (and sounds very cliche) this is an opportunity to get long(er). Over the past few days there has been a buyer in the inter-market spreads (i.e. a customer has purchased 8,500 May-July spreads and another has purchased 10,000 June-September) which leads me to believe that there is real interest in seeing the overnight rate trend higher as the Fed reduces liquidity in the system.

If you subscribe to the idea that the rates will have to drift higher (say from .12% to .20%) here's a thought on how to capture three meetings from the Federal Reserve and at least be 'set up' for that move.

We bought the July 68/75/81 put fly for 1.50 tics

If the Fed 'hints' at moving towards a more standardized target of .25% one could expect the July Future to begin the drift back towards 9975. Doing this trade in July gives you the March, April, & June meetings and minutes to spark a bit of rational thinking back into the market. Ideally, July will head towards 9975. You'll notice that the butterfly's two shorts are the 75 line. To maximize our return, we need to settle as close to .25% (9975) as possible. If that happens, we will net 425 tics per 100 lot (or $17,710). The max loss is 150 tics per hundred ($6,250) and this is realized fully with a a July settlement outside of 9968.50 & 9981.25. Three to one on your money, with a directional bias, actually seems to be the correct move. Merrill Lynch has also been a consistent buyer of this spread.

Remember, this Fed doesn't want to spook anyone and I think they will broadcast any type of change (to the language or posture) loud enough for all to hear. This means that they may hint to a language change, then tell you about a change that will happen, and the finally make that change. Capturing all three meetings for any (or part) of this scenario to play out is most advantageous. I'm sure most of  readers are familiar with the old phrase "Buy the rumor, sell the news." Hopefully, the trading community agrees and lays into the July as Fed policy starts to change.

It's going to happen: did you see Hoenig today...he wants to get these 0% rates moving too.

Rate plays for Down Under

Time to jump in the balmy waters of the Great Barrier Reef and taste a little bit of Australia. Practical Thinker has been snooping around the up-coming Australian rate decision due out at 10:30 EST. As usual, his homework is impeccable and his results...well, we'll need to wait about 45 mins.

Here's our trade:

Long the AUD from .8990

Target: .9070 {Sold out around .9040}

Stop: .8900

Start the clock, I don't anticipate a long wait on this one. 

~LH

Down but still chugging

What we had believed were easy layups last Wednesday (previous call), has turned out to be quite the difficult set of trades. We had been looking for a hint of optimistic news coming out of the Humphrey Hawkins and got very little market agreement. By optimistic, what we really anticipated was some type of hint towards further liquidity draw downs or some other signal that the historically low targets were going to finally start to climb back to normalcy.

Our gold stop was too tight. Though the play was exactly right, we didn't allow enough room to wiggle towards the downside and it cost us a winning trade. Looking forward, we would like to try a two week gold trade with a bit more slag in the line. We initiated longs at 1116.50 in GCJ10. Our target is 1145-1155. Our downside trigger is 1095.50 and our allotted time is 10 trading days.

We have noted the VIX (Yahoo!) here before and we like to use it as a gauge for some of the option plays we execute. It's currently trending lower and if the general market continues to grind higher, we anticipate multi-month lows. Our play to capture this as well as a perceived top on the SPX is to sell ATM calls. The trade we like is the SPX J1105 call at $16. If we trade higher, you have 16 ticks to hedge your shorts, but if it is the grind higher (a tick or two a day) the locals will extract a pound of flesh on the ATM Volatility (currently about 18%). Our thought is that there is a minimum of 10-15 ticks to the downside and wouldn't be surprised to see a 1095 print by Monday at noon. This is strictly a 1-4 day trade and we'll be looking to cover if we start trading south of 1090.{This has been a painful trade and even though I agree with it in principle, we're going to need to cover all of it. Though not the optimum way of doing it, I bot all my short futures in at 1120.75 locking in a loss and I'll have to stay alert for a huge sell off. I'll probably buy some puts to lock away downside risk. Not our best trade}

Our U/U trade has been beaten up. Our longs were initiated at 27.50 and over the last two days it has traded as low as 24. We have added to this position and continue to look for a push back towards to low 30s. Our averaged price is now around 26.

Finally, Mr. Practical Thinker has put his devised a spectacular, end-of-the-world, insurance policy (PT: you should expound on this strategy and why it is so dynamic)

Buy FFJ10: 9984.5

Sell EDH10: 9973.75

We would recommend the normal ratio of 6:-10 which is dollar flat.

Hopefully we get the moves we've been waiting for. Enjoy the weekend. 

~LH

Crash and Dash

Here's what we had and covered:

• Long US from 116.25 out at 117.23 (Old Baron's call)
• Short SPU from 1108 covered at 1094 (Mr. Practical Thinker nailed this one)
• Short the AUD from .9000 from the overnight session of 2/22-23, covered at .8895 (Mr. PT again)
• Long the ECH10 135.85 from 248. We are looking to sell this out entirely for a fractional winner
• Short EC at 1.3585 covered 1.3520
• Short CLJ10 from 79.875, we were almost stopped out at 81, but it held and we covered at 78.855

Initiated the following:

• Our much beloved U/U (Fed Funds vs ED) is back in play. We're long from an average of 27.5 targeting 31
• In the ED we are long the U/Z futures spread from  30.5 targeting 35.
• Long GCJ10 from 1104 with a tight downside stop at 1097 and a target of 1127 {Got Stopped Out in the overnight session on German comments about not helping the Greeks 2/24}
  
• SPX H1050p, we would recommend a very short term trade of shorting this put. Look to cover within 48 hrs.{{We bot the H1075p for 10.00, effectively locking in the 1075-1050 p/s for $2.00. There is a gap from 1074 to 1093 from Feb 16th and we will be looking to capture the retracement as well as a bit of follow through. That p/s is currently 3.25-3.65 on settles 2/24}

Tapping out after the Fed Announces

• Unloaded our NOB (sold US at 116.18 and bot TY at 117.06) and collected another 883 ticks
• Scalped the SPU's like champions and looking to dump it for the weekend
• U/U we actually sold it too early and missed the 36s but enjoyed a nice pop nonetheless
• Never got a chance to sell the AUD
• The EuroFx has sat around pivot, even with the swings, it hasn't broken out of our ranges

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