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

Blowing up, not Blowing out

Back in June '11, after a few beers, I began to shoot my mouth off about my athletic prowess as a runner. Though I hadn't run since 8th grade cross country, I was sure that I could still do it and furthermore, proclaimed that I would be running at least a half {if not a full} marathon by the year's end.

First race I ran was September 11th and it was one of the Chicago's Half Marathons. I finished...though its not exactly clear how. At some point, dehydration, hypoglycemia, and sheer lack of training caught up with me. I staggered the last few meters to the finish, woke up in the ambulance to some EMTs asking me questions, passed out again to wake up in the ER, passed out demanding that they don't cut my shirt off or destroy my iPod, woke up and passed out again.

I had hit the the runner's Red Line and had pushed my body past its working zone. Suddenly I had a new respect for the running and the toll it can extract from your body if you're ill prepared or not properly conditioned. In a strange, quasi world, it reminded me of trading.

It was as if the race had become a metaphor of my trading. Maybe I staggered to the finish, but the results had been less than impressive. My time of 1:38 was nothing spectacular and my arrival at the ER was ultimately a kick in the shins. It was as if I had just been trading huge, slinging futures here and there until the weight of my own position caused me to puke. All traders that have longevity in this business seem to have an innate sense of when to hit the eject button on a loser. Strangely in a race, that eject button was the finish line, but to hit in an orderly fashion, would have required me to walk. In my mind Walking was the same as Puking a position. I wasn't willing to make that trade. The results are documented in my permanent medical history.

I've made the puke trade countless times. It never feels good during the vomiting session, but the relief shortly thereafter is always euphorically refreshing. I'm reminded of one of the few stories I can recall from my uncle Al before he passed away. After listening to any problem you might have had he'd calmly say, "It doesn't matter how many times you've fallen off the horse, it only matters how quickly you get back on." I attacked running with renewed vigor. I adjusted my methodology, changed my diet, trained differently...almost as if I had gone back to the desk, found the charts and worked a new strategy for the next time my positions went awry.

I don't share this to say that I've got it all figured out in either of these areas {running or trading}. But I will say that I continue to do both regardless of the beat downs. The goal for me isn't to just finish the race or exit the trade, it is to smash my personal best and to squeeze every last tick out of the winners. More running tales later on, but for now, back to the grind of the trading day.

~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

One down 11 to go

January is almost in the books. Can't say that it was a horrible month, though the trade has been slightly less than amazing. The most salient point to take out of the month was Ben Bernanke's latest round of QE2.5 {term stolen from Bill Gross}

The idea that we're not going to get any movement until late 2014 is disconcerting to say the least. Spread percentages are currently priced in the low to mid teens all the way out through 2013 though, early last week some of the fourth quarter spreads were implying the chance of a 25 bps raise at about 25-30%.

Ultra low rates mean that banks will continue to make shadow profits, burden the public sector with their toxins if need be, and nurse patiently on the teat of the federal government.

Trades:
We've kept out March 9912.5 straddle on in the Eurodollars. We've adjusted for delta and we're currently short 70% of our futures from an average price around 24.5. This might seem low, considering that we are printing 9932.5 as I type, but this is just how the gamma game works. The last few deltas will probably be MOC {market on close} near the end of the contract's life {especially if we don't see a pull back into the low 20s}.

Our June put spread is still intact. We have made no adjustments as of yet. However, if we see a sustained rally above 9955-56, we will be looking to roll the strikes up for a minimal cost.

One year butterflies continue to print in the lowest ranges seen in many years. That fact, in correlation with the Green futures {March '14 - Dec'14} being at historical highs leads us to believe there are some unique trading opportunities out there for those willing to take a bit of risk. Both the Sept '13-'15 and the Dec '13-'15 flies have a zscore of -2.5 of more {implying they are more than 2 standard deviations away from their 200 day moving average}. Granted, this might be the result the newest disclosure that the Fed will most likely be on hold through 2014, but if you're willing to stomach a bit of pain {or maybe lock it in for 6-12 months} these trades may provide the return you're looking for.

~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

2012 Predicitions

Everybody is doing it these days, why not throw my hat into the ring. Besides, its always fun to be ridiculously wrong and subsequently mocked.

I'll focus on the areas where we actually trade, work, and enjoy.

Left Hash's Calls for 2012

Fed Funds: 

I think Ben and his gang have sufficiently squashed any hope of a rate hike for all of 2012. Their language at the last FOMC meeting even hinted at further QE, which in my opinion, is an even bigger mess than the one he's trying to solve. The funds rates have been settling around 7-9 bps for a while now and though the market and its participants don't really like this level, I don't foresee it moving more than 4-5 bps {and the only direction is lower}. I am comfortable selling the 1 year 87-93 strangle strip at 39.5 {1.5.12 settlement prices + some modeled data}. Any premium collected with cover you in the rare event that we actually move. Additionally, I believe that our model will create a lot more opportunities to trade if we do head lower and spreads start expanding. I firmly believe, a settle outside of that strangle has about a 15 delta. 

ED: 

I don't believe LIBOR will stay here for the year. I believe that the European banking/sovereign debt crisis has 'mostly' blown over and we'll begin to see a return to cheaper money. If Ben and company do initiate some type of QE3, I don't think its out of the realm of possibilities to see the 97 line come back into play across the whites. However, I would wager that for the most part, you'll see LIBOR average around 40-45 bps for the year with an occasional dip down into the 50-55 range. I would buy put spreads to take advantage of extremely rich put skew and to hedge some of the event exposure {9925-9900 or similar}Buying calls on the grind higher also would be prudent, as they somehow 'decay' on an uptick in the futures. It will be interesting to see if the Fed Funds vs Eurodollar correlation comes back into line as 2013 {and raising rates} looms. 

SPX: 

I don't really trade equity futures except to speculate. My one year target is 1405. The range will be 1080-1465. Drifting lower at the end of Q1 will bring about some type of QE3 and rally the equities into the 1400 range. A long grind for the summer months, followed by a slight pull back into year's end for a gorgeous print of 1405. Buy ES puts when the VIX is below 20, sell everything you can if it spikes above 40. 

Yield Curve: 

The Tens will print 1.50% and the Bond will touch 2.40% and because neither is good for anyone but giant banks, they will snap back and settle at 2.25% and 3.50%. The locals still have the front skews to the calls {implying that in the near term, the traders feel we'll trend higher and therefor pay a premium for that protection versus the puts} However, if you look 6 months out that trend levels out and 9 months out, it has actually shifted towards the puts {implying lower price and higher yields}. I wouldn't be afraid to buy puts and sell calls up to 3 months out. 

Gold: 

 Currently $1600 

2012's high: $1872 

2012's low: $1344 

 Settle: $1440 

Crude: 

Currently $101 

2012's high: $114 

 2012's low: $82 

Settle: $88 

 EuroCurrency: 

Currently $1.2725 

2012's high: $1.3630 

2012's low: $1.2200 

Settle: $1.3150 ______________________________________________________________________ 

Never to be out done, my colleague, Mr. PrD {Philosophical Rail Defender} has offered a quick glimpse at what he believes will be our 2012. 

Mr. PrD's Calls for 2012 

Overall, I think 2012 will have a periods of reflationary hopes, dashed by deflationary fears, much like 2011. Much will be dependent upon further increases in central bank balance sheets. However, I predict that the half-life of any such increases will be increasingly shorter and shorter. My advice for the year is not marry any one idea, keep an open mind (don't fall into the trap of extreme sentiment accompanied with herd psychology), and understand that we live in exponential times. 

That being said, the predictions are: 
S&P 
High:1320-1350 
 Low: 950-980 

Oil 
High:110-112 
Low: 65-68 

Gold 
High:1850 
Low:1400 

30 Year yields 
High: 3.75 
Low: 2.40 

Euro currency 
High: 1.3400 
Low: 1.1800 

Hope we all make a ton of money this year. 

~LH

Goals for 2012

I'm no Jim Collins and this wont be a post filled with BHAGs. Rather, I just want to lay out a few macro bullet points about what I'd like to accomplish over the next 12 months. This will be my acid tester. A little strip that I've placed out there for everyone to poke at...and maybe hold me accountable to.

Goals for 2012 {1-5 Corporate, 6-8 Personal}

1. Create a sustainable trade in the EuroDollar Future's market. Not just taking blind risk {e.g. "Let's buy that spread because it feels cheap."} instead, making educated assumptions on risk and return and trading it with a directional bias at all times.
2. Manage my electronic trading more efficiently. Whether that is my auto-traders, auto-spreaders, or just my click trading, I want it to be done with more streamlined efficiency. I want to be able to watch the code work as planned and react accordingly if something gets derailed. 
3. Profits: I'd like to hit the % break by the end of Q3 2012. This will require at more effort than I'm currently exerting and wont be an easy goal. If we can achieve this prior to Sept 30, 2012, I'll have a legitimate shot at a personal financial best for a fiscal calendar.
4. Grow as a team. I've mentioned that we're adding another member next week. My goal is that he doesn't make a dime for the first three months. REALLY. The last thing I want is someone that thinks they have it all figured out. However, I do want him to succeed, and to wildly pass even his personal goals and aspirations. This will only be possible it we {the three of us} can figure out how to work as a team and how to build each other up and not destroy the boat we're all sailing on. I want to be an integral part of that growth and mentoring.
5. Begin to ask the question(s) about what the next steps are. Do we expand in terms of personnel? Allow ourselves to take on customer funds? What is the next level of our trading experience? 
6. Write MORE. I maintain a couple of blogs and a pair of Twitter accounts. I want to make sure that I respect what's in me to write and actually put most of my thoughts {trading related} on here.
7. Continue running. Specifically, I want to run the Illinois Marathon {Champaign, April 27-29} in under 3 hours. That should allow me to qualify for the 2013 Boston Marathon. I also want to run Chicago, however, its too far away for me to pick out a finishing time as of now.
8. Finally, I want to do some type of educational growth in my life. Whether that is continuing education or a refresher course or perhaps heading back to school for some type of graduate work, I'd like to reengage with learning.

That's it. I'm sure there are a bunch more. However, as I try to distill them down to the macro themes, these are the ones that keep emerging. Hold me/we/us to them.

as a fun link, read this Jim Collins post...it just makes sense

~LH

Closing the year

I'm looking forward to closing the books on a rocky 2011. In terms of trade, it was tumultuous to say the least. That's a surprising statement considering Q1 of '11 was actually a great time to trade. However, as the year progressed there seemed to be no end to the speed bumps I encountered.

Chronological review:

• Jan-March: Everything was firing at full capacity. That's not to say I didn't have losing days, but the quarter was profitable and gave reason for hope.
• April: I hit a legal snag that interestingly intersected my personal life with my trading life. It cost me 10 trading days and a way too much money. Externally, I was able to deal with it by escaping to Mexico for a week. Internally, it was just extremely frustrating to feel like like the victim and still be forced to play {pay} by the rules.
• May-June: The doldrums began earlier than expected this year. Many of the spreads began there march towards 0. This seemed strangely early and paper was hell bent on selling anything with value in the Fed Funds. I eked out a scratch for the quarter, but not without some last second heroics. 
• July: Dead, didn't trade very well. My partner had a good month, but I was never able to gain traction.I decided to start running {well, actually, I started on June 11th, but now I got serious}with hopes to complete a half marathon and a full marathon by year's end.
• August: At the Aug 9th FOMC meeting, Big Ben decided it would be a great idea to take a few hundred thousand from me, my partners, and my backer by announcing the following, "The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013." As we all rushed to puke our spreads to each other it became apparent that I would need to find another market to trade.
• Sept: The grind back toward parity was slow and tedious. Little by little I peeled off the pieces of my book that showed small profits and gradually began to march back to even.I ran my first competitive race since 8th grade...and wound up in Jackson Park Hospital's ER with dehydration and hypoglycemia. Not to be deterred {it was just a bad trade, right?} I continued my pursuit of running my first marathon in December.
• Oct: I officially team up with the Neapolitan Man, merged our books and began a quest to add new products. Then the MF disaster struck. It paralyzed our accounts and broke our stride just as we were beginning to make significant headway. We're thankful for our backers who have made us whole, even though they still have outstanding monies with Corzine and Co. 
• Nov-Dec: We remained profitable, though we were never able to regain the swagger we seemed to be rolling with prior to the MF collapse. We identified some of the areas which we'll be focusing some of our additional energies on {trade wise} in the next few months and years. We found our next trading companion as well Mr. PRD {Philosophical Rail Defender} and he begins his tenure at the first of the year. I did run my first ever marathon {a full 26.2 miles} and surprised myself by clocking a 3:10:25.

Looking back...it wasn't a horrible year, but I'd prefer to never repeat it. I have plenty to be thankful for, but there are vast areas that need improvement. Everything from trading, to running, to relationships, to life, I look forward to attacking them all in 2012.

Hopefully, I slip one more post in this year and lay out a few of the goal we have for 2012.

~LH

ReEngaging after a long drought

It's been a long time since I've sat to seriously write my trading thoughts. However, as the New Year approaches I once again feel the urge to type.

Realistically, it wont be a daily thing. To be honest, it will be whenever the inspiration strikes. My goal is to take the notebooks and post-its around my desk and turn them into coherent thoughts. I no longer have the privilege of sitting next to the Practical Thinker, but I'm still seated next to the fabulously brilliant Neapolitan Man and we're looking forward to bringing on one other individual to help with the increased bandwidth. I'll probably be the primary writer, but their ideas will greatly influence what gets put out here. 

We'll stick with what we believe we know best. Mainly Fed Fund and EuroDollar futures and options, as well as some yield curve materials. We haven't traded a yield curve product for at least a quarter if not two, but our goal is to add them back into the arsenal of toys. When our newest member Mr.PrD {Philosophical Rail Defender} joins us at the first of the year I expect that we'll add commentary in the FX and hard commodity {GLD/CL} areas.

In terms of updating what we have on for the last few weeks of December, don't let this disappoint you...we've got virtually nothing on. A few small scattered option trades here and there, a tiny FFs book, and a scant amount of ED 1x2 double flys. As the New Year rolls around, we'll be looking to build a position and running timeline to track our success and failure!

Closing Note:
I don't plan on pasting large amounts of non-original content on here any more. I'll use my Twitter account to repost articles that I find useful. Feel free to join along in the fun @LeftHash

~LH