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

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