Probability Distributions of EDZ8

July 29th, 2018|Basics, Featured|

[Below is a Trade Thought essay that discusses a real-world application of the options article I wrote for the CME]   This will probably be a multi-part series.  This week, I wanted to discuss the pricing of the front options flies.  Clearly from the FFV8 pricing and lack of movement, the markets just do not think the Fed is going to skip in two months.  We can easily cover the skip scenario by buying FFV8.  We should wait until the August meeting has passed in a few days.  I also don’t think the Fed is going to hike more than once a [...]

Algo Shenanigans

November 26th, 2017|Basics|

[WARNING: Idle Speculation Ahead] Last week, I mentioned what I suspected was potential spoofing in the ED markets.  Of course this was just a feeling.  I don’t have the tools to record and monitor the bid-offer quantity data.  However, I did run across this article in ZeroHedge, on how a trader was fined for trying to manipulate the algos.  The gist was that someone put in large buy orders, trying to get trend-following algos to come along (and maybe even raise the bid).  He would then proceed to cancel his orders and sell to the algos.  He was punished, but [...]

Legging Lessons

September 17th, 2017|Basics, Featured|

Since some of you may be new to ED trading, I may occasionally do a “Trade Basics” segment.  There was an interesting trade that went through on Friday, and I thought I would discuss it.  Almost 25K EDU7-EDV7 spreads traded.  This is a crazy amount to have traded, considering the open interest on EDV7 is only 103K contracts.  I’m assuming this is probably some kind of unwind.  There appears to be an equally unusually large volume on this spread trade on August 2, and since EDU7 rolls off Monday, it seems reasonable to conclude that this was an unwind of [...]

Conditional Curve Shape

June 4th, 2017|Basics|

I think of value on the curve in two ways: (1) bottom-up, and (2) top-down.  Bottom-up would be looking at a small piece of the curve and thinking about the value there, whether it’s a particular Fed meeting, or slope or curvature on a segment of the curve.  This is probably the most common way to come up with a trade idea.  Top-down would be looking at the overall level of rates and asking what implications makes sense for the shape of the curve. On Friday, ten year yields made new “post-election” lows (starting a few days after the election [...]

Widen Your Trading Horizons

March 13th, 2017|Basics, Featured|

One of my pet peeves about trading is how the general trading population can only think in terms of “up or down.”  As a result, people tend to under-appreciate market commentary that is not related to correctly predicting/forecasting/guessing “up or down.”  I wanted to discuss the various forms of analysis that you can make use of: Correct directional analysis. This is unquestionably useful when correct, but very few people are right significantly more than about 55-60% of the time.  Very few.  If you take a longer time horizon, that number could be higher.  But it would be unrealistic to think [...]

Curve Regimes

February 19th, 2017|Basics|

I finished that article on regime change for a trade magazine, and it has been approved.  It should be published some time in the next few weeks (I’m guessing).  There was one part of it that I thought was particularly interesting that I wanted to highlight because it seemed very relevant to the current market.  The market positioning has been “overly bearish” for some time, and partly as a result, the markets have not been able to sell off for most of this year.  EDZ0 is UP 2bps on the year, despite much-better data and a hawkish FOMC.  That’s got [...]

The Six Pillars of Long Rates

December 12th, 2016|Basics, Featured|

There are Six Pillars of low rates in the long end. You’ve heard me discuss these in the past, but not presented in this way. We have the Big 3 QE central banks (ECB, BOJ and the Fed), plus three other factors (the neutral rate, inflation, and demographics). I thought we should do an inventory of where we stand on these various drivers to gauge the potential long-end selloff: • The ECB’s QE. The ECB was a little late to the QE party. But they had been buying €60B per month since March 2015 (with the exception of this 12 [...]

Fed Meeting Pricing: Quarterly vs Non-Quarterly Meetings

August 22nd, 2016|Basics|

One of the more interesting things from last week was that FFV-X traded up to 2bps.  For most of the year, we said it was highly unlikely for the Fed to hike less than a week before the election, and it has been close to 0.5bps for several months.  However, the “lottery ticket” effect that we have discussed for some time now has appeared in full force.  As the Fed meetings get closer, people feel the need to take a 10+:1 shot, get protection for their books, close out shorts in the spread, etc.  And with the current Fed, people [...]

Jobber’s Paradise

August 15th, 2016|Basics|

[The table of Flip Trades have been omitted, in consideration of subscribers.  However, the main point of the write-up holds:  that you should adjust your trading strategy and ranges, based on the trading environment.  Don't be a one-trick pony.  Just as a good football team can win on offense, defense and sometimes special teams, you should be able to make money in many different environments.]   Last week the Portfolio just surged past the old P&L highs, and is up almost 200BUs since April.  This performance is in stark contrast to the Trade List, which has been languishing.  On the one [...]

So Many Choices!

July 29th, 2016|Basics|

People new to Eurodollar futures may not be aware of the various possibilities in trades that are available. Even people who have traded EDs for a while don’t think about all the possibilities. EDs aren’t like other futures, like gold or orange juice. You can actually do a lot more with them than most people realize.  Below are many of the things you can do with EDs, and let’s say you wanted to take a bearish interest rate view:   Trade Directionally. Sell a single contract (i.e. sell EDZ7). Trade Spread. Buy a calendar spread in the front of the [...]