When considering a trade, most people just think about how much a trade will make when they are right, and how much they will make when they are wrong. But those should not be the only considerations. There is also the scenario where “nothing” happens. All else being equal, you want to also make money if the market just “sits” there (via carry and/or roll). The longer the time horizon on your trades, the more important the carry and roll become. Think about “nothing” more often – it happens A LOT more than you think.

So when you go through the preliminary analysis (since we know there is a lot more to a view than just up and down) of your trade alternatives, think about up, down and “nothing.” Say you are bearish rates. There are certainly merits to just selling a futures contract. Some of the most important features of a single contract directional trade are: (1) ease of execution (both in and out), (2) deep liquidity, (3) lower transactions cost, and (4) ease of monitoring. And especially if this is a very short term or high frequency trade, this makes more sense. However, one of the issues with just selling a futures contract is the negative roll (on a typical upward-sloping yield curve). This could make a longer-term bearish trade somewhat less attractive, because the longer you hold it, the drift on the contract could cause you to lose money. And if you are short a bond, you will also lose the carry.

Considering the Fed has revised down their GDP and dots projections repeatedly since the start of the recovery, AND they have delayed rate increases for most of the past two years, trying to have a perpetual bearish position via an outright short could have cost you a fortune. And let’s not forget the Elephant in the Investing Room, stimulative policies by other central banks and a lower neutral rate. Those are all reasons longer term bears have all gotten punished in recent years. I’m not saying bearish trades are bad. If you feel the timing is right for a bearish trade, you just need to pick the right one…