[Nov1 17: The Newsletter has a dedicated section for traders who like to job tight ranged trades, that can be scalped for a small profit.  These were my recommendations from the weekend.  In addition, I suggested buying EDZ9 1 year fly as a flip in an email during the week.  Watch tomorrow for my week-end thoughts.]


Now that we have had a regime change, we need to be more cautious. Within the first 12 contracts, I think for now, we should just scrap everything, give it a little time.  The Flip Trades were focused on making money in the old regime (a rangebound environment).  As I mentioned in the email on Wednesday morning, we have a regime change and we clearly are not rangebound any more.  We had to stop out of some trades, but we had some nice gains in the official CA trades.

The back end of the curve should have less volatility and still be stable enough to flip.  In particular, I like flipping the three trades on the CA Trade List (or you can just hold these trade for a larger gain):

  • F14 (Buy EDZ9-Z0-Z1 year fly vs Sell Z0-Z1-Z2 year fly): Buying any year double fly at negative is a good look in a deferred hike environment. We have on Z9 1 yr double (settled -2), but H0 or any other lower double fly is just as good.  This is because the front of these year doubles could easily get into double digits.  The two year high on EDZ9 1 yr double fly is 9, and the low is -5.  So the ratio of the historical high to the low from the current level is about 11 to -3.  That is great risk/reward.  So you can buy and hold or just flip.  AND IT ROLLS POSITIVELY!  This is why I am holding on to the rest until F14 gets positive.  In the deferred hike environment, these could move up much more quickly.
  • F32 (Sell 1x EDH1-H2 spread vs Buy 1.5x EDH2-H3 spread): This structure has been quite stable, and we are now back at the lows. The thing that looks attractive to me is that among similar structures on the curve, this is the lowest (granted it was a poor settle).  However, in this environment, you probably want to weight the legs 1:2+ (sell 1x H1-H2 vs buy 2+x H2-H3).  This is because the front spread no longer rolls positively (although the front fly does).  So think of this as selling the H1-H2-H3 fly vs buying the H2-H3 spread – both of which roll favorably.  In a deferred hike environment, it’s hard for this to get much lower.
  • F34 (Buy EDZ1-Z2 spread): I discussed the reasons why I like this trade in the previous section. But what makes this a great flipping vehicle is that it is close to the lower bound, which is what you are looking for in a flip.  It’s hard to see an environment where this gets much lower, when the Fed is looking at slow and gradual (deferred hikes).  It fulfills pretty much everything we look for in a flip trade: it is “bounded” (5 year chart looks great), fundamentals make sense, rolls positively, has some but not too much volatility and has phenomenal upside.

I also like trying to buy the non-quarterly meetings again.  Look for good value in the meetings that make sense to your view.  With the curve steepening, most of these should not be near “zero.”  Stay tuned for other Flip ideas.