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

Super Bowl

I had intended on getting this out on Saturday or even Sunday, but as usual, life got in the way. By life, I'm referring to a 2 hour trip to Costco, church, little people who want to wrestle, and 36 miles of running over a 36 hour span. Oh, then there was that part about the Super Bowl consuming ~4.5 hours of my life. By the time I actually got around to writing, my brain was fried and it was moved to today's agenda.

Friday was a fairly busy day. I don't really want to write about the legitimacy of the NFP data and whether you believe it or not. Rather, I'd prefer to focus on what happened in the products we watch and where we think the next few weeks will take us.

Let's talk Fed Funds. There was a noticeable volume spike heading in to the week's end. Where we are normally seeing 18-22K contracts a day, we suddenly saw a bounce up north of 50K. Obviously, customers wanted to move some of their inventory prior to the release on the Unemployment figures on Friday. On Thursday, prior to the data, a new customer came to buy 3000 of the July '12 -- Jan '13 future's spread. He started accumulating at a price 2 ticks and paid up to 2.5. We count spreads on an adjacent month basis. That is to say, that selling 100 N/F spreads actually resulted in selling 600 spreads {100 of each adjacent month NQ, QU, UV etc...}. At the time, 2s looked to be a decent sale. However, by the time the customer started lifting our 2.5s the trade no longer looked attractive as all the hedges has disappeared.

As the number hit the tape on Friday, the Funds sold off 1-2.5 ticks {which, if you're familiar with this product, is a substantial move}. Right on cue the customer was back to buy 1000 more spreads and though he was only 2.5 bid, we were sure that he'd need to step up and pay at least 3.5 in order to get filled. Hindsight trading says we should have unhitched the wagon and dumped every spread we had in our inventory at that moment. However, we didn't and within an hour or so, the Funds had rallied, the spreads had collapsed, that bid was long forgotten as the 1.5s began to trade in N/F. The turn had been subtle, but the force behind it showed that market participants still agreed that we're not going to see a Fed Funds rate change until 2014. We did well when viewing the traded for 50K feet, however, had we taken a more aggressive stance prior to Friday {which market participants did post-NFP} we would have locked in a great trade.

~LH

Get Long {might be wrong}

Our markets are slow and getting increasingly cheap. A few thousand contracts here and a few hundred over there is about all we're seeing these days. ED volume has fallen to new lows in total contracts traded. It's as if the world is in a post Thanksgiving induced coma. It has been fed cheap money in infinite amounts. Now as it lays and tries to digest everything, its being lulled to sleep in an environment of sinking volatility.

I'm seen this movie before, somehow it always ends in tragedy. {However, it is only painful if you are caught holding the potato when the music stops.}

Few of the things we would like to do.

1. ZH diagonals in the TY and US. I would like to grab some cheaper gamma and finance it by selling wings. Ideally, we would like to do this with puts. Our medium term outlook {3-6 months} is that we'll stay range bound in the yield curve with moderate moves within the range that will help you to finance your decay. {Z28p v H21p gives you positive 6.5 gamma for 2.75 ticks of decay a day}In the event of a credit meltdown, we suspect the bonds will go higher, making a short longer dated call a risk to your overall position.

2. In order to capture the 'cheapness' of implied risk, we think that you're best served putting on steepeners across products in FF v ED {sell the ED and buy the FF}. Of particular interest to us is the EDU v FFU. The spread between the two of them has recent traded at its low {28} and it provides a couple of plays as we go forward. a) if the world ever gets frightened by credit risk, European or American GDP, or some other nascent economics flag you'll most likely see the EDU react in a much more violent way then the FFU. b) under current decay models, the EDZ v FFZ is at 17 with a QE2 bump priced in. This means you have a pretty solid floor at -9, though we are looking at a stop around the 24 range and an anticipated exit at 40.

3. We still like being short the NOB. If you can stomach the stress, it has a long way to fall back towards reality.

~LH