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

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

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