Where I landed

So, I mentioned that I left my previous trading home and struck out again to find my fortune. In some ways, I feel like a prospector heading west in the rush of '49...full of hope and anticipation, blind to the perils that may lie ahead and intensely focused on just one goal.

This isn't my first rodeo, I've moved or rebranded or regrouped at least 10 other times in the dozen years that I've spent in the financial markets. It is part of the game. Most contracts are a year long, they have a graduated payout that peaks as the contract expires. While I was writing this, I took the trip down memory lane and dug up a few statistics about my career path thus far.

• I've been fired 1 time, it was my first trading job. I learned that you don't trade against Goldman Sachs when they come in to buy a ridiculously 'over valued' put. 
• I've had a 12 positions ranging from clerk to junior trader to trader to partner to owner. The spectrum is pretty broad and the pay scale didn't always match the titles.
• Speaking net income, the smallest yearly total I've made since striking out on my own {circa 2003} is an abysmal AGI of $18,750. Ugh, that was a nasty stretch.
• I've traded the following: 
• Indexes
• SPX options/futures
• NDX options/futures
• Equity options in: 
• TYC
• BAC
• HOG
• KO
• CIT
• CPN
• QQQ
• Yield Curve 
• ZB options/futures
• ZN options/futures
• ZF options/futures
• Commodities
• Nat Gas options/futures
• Copper futures
• Corn options/futures
• Wheat futures
•  Soybeans futures
• I've had 3 partners, all three have eventually quit. 2 have left the industry completely
• I've been with 5 different clearing houses
• Paid one fine for $30,000.00

Seems pretty tame when you write it all down and piece it all back together. But that's my story and I'm stuck with it. My goal has always been the same. Provide for my family and my lifestyle while doing something that I really love. I've often said, "I would have no idea how to assimilate into the corporate world." This career in trading is a dead end. Once you really taste it, really taste it...there is nothing like it.

Back to spreaders. Updates and predictions next post. Also, a pretty decent set of calls happened HERE.

~LH

Where the Summer Went

It's been a long time since I got around to writing. It's not that I've not wanted too...simply put, I haven't had the desire for a strange set of circumstances.

In terms of an update, here is a quick recap of the last few months.

• The spring was pretty steady. We were running two sizable books with a decent amount of PnL. Our Fed Funds book was like a constant rockstar and my partner was doing a better than average job at moving inventory and locking in profits on a daily basis. Unfortunately, my Eurodollar strategy was becoming more and more sporatic. In an effort to grow PnL's, I began trading some of the front flies on a mean reversion basis but this meant assuming more risks. Though I wound up taking in some profits, it wasn't an easy trade and some of the geopolitical aspects burned me for substantial losses.
• We take profits once a quarter, as June wrapped up, we were less than gangbusters on the P side. Summer is usually a slower time in the interest rate complex. Most of NYC goes to the Hamptons and turns off the markets with the lights as they leave. On a personal note, my wife and I were expecting a baby in early July and I was looking forward to taking some time off. 
• The summer took an unexpected twist when my partner asked to dissolve our partnership on July 23rd. He wasn't comfortable with the risk of the Eurodollar book and wasn't pleased with the return on my half of the partnership. In fairness, he was shouldering a majority of the profits so I can't say that I completely blame his decision. However, that meant a couple of things.  
• I would need to decided what to trade. If that was going to be Eurodollars...then steady as she goes. But if I wanted to go back to Fed funds, or options or yield curve or ANYTHING else, I needed to clear off a pretty sizable position that stretched out to 2017.  
• Was I going stay where I'd been for the last 30+ months, in the same office as a former partner?
• In some ways, I took a cop out on deciding what to do. I hit the eject button on a majority of my Eurodollar book. I think it cost me about 20K to simply liquidate it at the market. In hindsight, a very nice move...it cleared my head and I was able to move forward. I stepped back into the Fed Funds and began to trade it but with a new caveat. I left it intentionally small as I began the quest to do something new.

Ultimately, I reached the conclusion that it was time to pack up and leave. I needed a fresh start, new office and some change. The quest to find a suitable landing spot actually proved remarkably difficult. But I'm here...fully set up and running at roughly 50% capacity. Over the next few weeks, I plan on ramping up fully and I'll get back into the habit of writing weekly. I have nothing else to do since I'm now all alone in a 7'x15' box with a couple of windows. That story is next time.

Special thanks to @GeneratingAlpha for forcing me to write again. I appreciate the nudge and I'll get back to it.

~LH

I need to post about our trades and current positions, but until then, enjoy the run. A first time race report: Not sure how to do a real race report, so as a first attempt, please bear with me on the learning curve. My goal has been to run in the Boston Marathon. However, as arguably the most prestigious race out there, there are certain qualifications that have to be met in order to participate. The first, and probably the most daunting challenge is the qualifying time. These times are broken down by your age and as of the 2013 race, they were significantly lowered. As an 18-35 year old male, I now needed to run 3:05:00 or better {down from 3:10:59} just to be considered as qualifying. The time was lowered because last year, they had so many qualifying applicants that they chopped it off by time and my age bracket had to be sub 3:08:40 {more than 2 minutes faster}. In order for me to get this goal accomplished, I was going to need a tune-up race prior to going to Champaign for my next full marathon.

The Cary Grove Hillstrider's Half Marathon is the self-proclaimed hardest half mary in northern Illinois. Sounds like the perfect type of race to get the competitive juices flowing again and to work out some racing strategy before getting into a full. It was unseasonably warm as we prepared to start. The 8 am temperature was 68 and though that doesn't seem exceptionally hot, it would play a factor in my performance later on that morning. This was a non-tagged race, meaning that when the gun sounded you ran and if you were in the back of the pack, well you were just going to have a slower time.

My half marathon goal was 1:27 to 1:28. I figured that would be a sufficient time because the goal for a full was 3:00 {ensuring that even if they lowered the BQ time bracket for my age group I should still be able to run 2013}. I wanted to go run hard enough that I had very little left in the tank at the race's end. This strategy would prove strangely detrimental later in the race even though it seemed like an excellent idea at the time. My training partner had previously run this race and offered a couple of suggestions:

1. The hills are intense and there is no shame in running them a bit slower than pace.

2. Open it up on the downhill portion

3. Save something for the last 1.5 miles...

Here's the map

Miles 1-3
The course shape resembles that of a figure eight, starting and finishing at the local high school. The first three miles begin with a gradual decent and then an impressive drop down to one of the race's lowest points.

I was a bit slow getting out of the gate as I nestled in the front of the 7-minutes per mile group. As a result my first mile was relatively slow time {in race time} but it felt much faster to me due to all of the weaving and grinding it took to break free from the masses. The decent down the that first big hill was fast and though I was tempted to really open it all up, I restrained myself, thinking it would be intelligent save it for the climb I knew was just around the next big turn. My three mile split was 19:46 and pace wise, that was near perfect for what I was hoping to run.

Miles 4-8
These miles were marked with rolling hills though they were nothing too over-powering. Only one of them would need to be rerun and it was a steep grade in the front and a gradual decline. I attacked the first few inclines pretty quickly, shortening my stride and pounding up them right at race pace. I could feel the burn starting to grow in my quads, but from what I remembered of the course map, there would be a long, gradual decline again around mile 7. Banking on this, I pressed forward. I had found a group of 4 runners that we're running 6:45 miles very consistently so I began drafting with them as we eased down mile 7. As mile 8 approached, I first noticed the sign for one of the hills; it said "hill #4" and also named it, though I can't remember what it said. This was a hard hill and I felt my energy truly beginning to wane. Thankfully there were Cliff Gels at the base of the hill and with that blast of sugar I could feel my energy levels rebounding even as I reached the backside of hill #4.

Miles 9-13.1
Mile 9 was the switch back point where you were back on a section of road you'd already run. It was a relatively flat, straight shot that would eventually bank to the south and head up that first huge hill we'd descended to begin the race. My speed was holding fairly constant, but as the sun beat down and the racers around me could sense the finish creeping closer, the speeds quickened. My 9th mile would wind up being my fastest {6:25} and in retrospect, when coupled with the hill that ended after mile 10; my race future had already been written. I remember passing another runner as I climbed hill #5 and he championed me on a great race and a powerful climb. As I forged ahead I could feel myself creeping very close to the dreaded "red-line". I knew that line, and I knew that if I crossed it, I might end up like my first half mary {first attempt}. I was forced with a decision point: slow down and lose valuable minutes or press ahead, cross the line and pray that I make it to the end. I knew that hill #6 still loomed ahead; I remembered my partner's warning to save something for the grueling finish, I made the call. I slowed. I gave up 35 seconds per mile in an effort to finish strong.

Mile 12 held the final hill, but realistically it was a set of 3 softly rolling humps. Unfortunately the damage had been done, I was now struggling to maintain my final mile at a respectable pace. I was unable to dig any deeper to tap any hidden energies. I was over the line, struggling to reach the finish. As I came down the chute, I faced my feared time. 1:30:14 as I crossed the line, two to three minutes late. Though I felt exhausted at the time of crossing, I knew that I had made a fatal flaw in crossing the red-line. It tricked me in to being far more defeated than I actually was. In retrospect, it wasn't the end of the world. I'd run a good race, on hills, and I had finished within a few minutes of my goal. I had done 13.1 at a pace that will hopefully carry me to a qualifying time in just a few short weeks. My public stats can be found on MapMyRun.com 

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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

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