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

A former life

This is too great not to re-post!

{there is some NSFW language}

I think I've had this exact conversation...more than once!


UPDATE: Here's the QE2 version with some choice words for the Fed and "the Ber-nack"
~LH