Home Forums Main Forum 2016 Trade Discussion

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  • Curve Advisor
    Keymaster
    Post count: 612
    #2329 |

    One of the things I do with my clients is I’ll give them feedback on trade structures they are considering. I thought I could do something similar here. It won’t be as timely and I may not be able to respond to every post. But having some place where people can discuss what is going on in the markets would probably be very educational. Depending on participation, we could probably start some other similar threads (for example, a non-ED thread, market view thread, low-content thread, etc). I would prefer this to be mostly a discussion of trades.

  • Laurent
    Participant
    Post count: 7

    Hi Joseph,

    What do you think of buying the U8-U9-U0 fly now that it is trading around 0-0.5?

    Thanks

  • Curve Advisor
    Keymaster
    Post count: 612

    Thanks for posting in the Forum, even though you are a subscriber (and could have emailed).

    Well, this trade has not been one of the better ones on the Trade List. I think there is value here (+EV), but it’s what I would consider a “borderline C” trade in the current environment. This was actually something I was going to write about in a future CA. It’s a little strange that practically every year spread from ED5-9 thru ED15-19 is within 2 bps of each other. I know there are locals that like the just smooth the fly curve, and I’m wondering if it is some form of algo keeping the spreads in-line. It could also be a function of people grabbing for yield. This is keeping all the flies in a tight trading band around 0. The trade fits my longer term view, but it could take a long time for this to materialize. It’s also not very attractive, unless you have low transactions costs.

    Let me know if you have a particular view you want to structure.

  • Curve Advisor
    Keymaster
    Post count: 1

    I sent out an email to clients Wednesday (Apr 27) that discussed the trade themes I like post-FOMC, in the front part of the curve:

    1) EDU (N & Q) will get pseudo-pinned for the next couple of months near the 99.25 strike. I like playing for 25% to 75% of one hike thru Q3 to be priced in for the near future.

    2) EDU seems cheap. While the curve is flattening, I like scaling into conditional call steepeners (overweighting the front leg), for something close to “zero cost”.

    3) Some of the things we discussed in the “Trade Idea Blackboard” also make sense, like selling M-U vs a little further out, preferably weighted.

    4) I still like the idea of a Dec hike. We scaled out some before the FOMC, and will look to add on further dips.

    5) I like playing for relative steepness in white-reds, but this has moved away, so I will skip.

    OF course things may change after the Employment report on Friday, but this is what I currently like “all other things being equal.”

  • bambam
    Participant
    Post count: 24

    Let’s entertain the following opinion even if you dont agree with it.

    As of today it can be safely said that the market had been unprepared for a hawkish surprise from the fed, we will see how the june meeting looks in tomorrow’s minutes.

    Let’s assume that inflation is coming back and that “transitory” effects are starting to fade away. June hike might start to get some traction but let’s just say we assume 50-50. My real view would be the dec meeting, betting on a hike there.

    Why not play in June? let’s say that a june play is to close to the front on the curve and we don’t like the liquidity(volatility) movements in there

    Would a FF fly on nov-dec-jan(meeting weighted) be a good structure in order to express this view?

    What kind of structure would you pay attention to on EDs to express this view(no M16 allowed).

    Cheers

  • Curve Advisor
    Keymaster
    Post count: 612

    I’m a little unclear on what you are saying… if you think June is 50-50, you should just sell FFN7 (has 100% of the June meeting and 13% of the July meeting. It’s basically risk 4 to make 21.

    The FFX-Z-F fly would not be good from a brokerage perspective because that position does not do a great job in isolating the meetings. Not sure what you mean by meeting-weighted. If you wanted to take a view on the Dec meeting, you should just buy the FFX6-F7 spread. This will get you short for the Dec meeting (and 5% of the Nov and 21% of the Jan meeting). The meetings in parenthesis are barely priced, so it’s not worth isolating imo.

    I’m a little unclear on what your view is… if you are saying you like the Dec meeting, and want something in EDs, you can buy the EDU-Z spread. The nice thing about EDZ is that it expires after the Dec Fed meeting. You can also do things in options, if you have a strong view on the number of hikes by year-end.

    • bambam
      Participant
      Post count: 24

      I guess my post was not clear enough.

      June is 50-50 in my mind, I just like to stay away from front of the curve trades. I’ve had really bad experiences with front flies going insane.

      The FFX-Z-F fly on a meeting-weighted means that the the structure is neutralized in weights 10/7 right now.(not 1-2-1)

      x6 = 99.51
      z6= 99.48
      f7=99.44
      On a weighted basis I see this fly (2)
      on a regular fly i see it at (-1)

      “FFX6-F7 spread. This will get you short for the Dec meeting (and 5% of the Nov and 21% of the Jan meeting”

      How do you get those weights?

      I see that spread as an exposure to 1.4860215054 meetings.

  • Curve Advisor
    Keymaster
    Post count: 612

    If you thought the trade was 50-50, and you are getting like 5 to 1, that’s a very good trade. You know your downside is limited to the 4 bps. You just have to size small.

    I’m not really sure how you are looking at the FFX-Z-F fly. The way I (and most people I know) look at it is in the following thread: http://www.curveadvisor.com/forums/topic/basics-what-is-priced-into-each-fed-meeting/.

    Rather than look at the fly, maybe what we should do is to look at the FFX-F spread, since that is an easier example.
    I’ve enclosed a graphic of how I look at the contracts. But without having any spreadsheet, you should know right away that 1.48 can’t be the correct number of meetings, because the Nov meeting is on Nov 2, and the Jan meeting is on Jan 25. So there are only about 8 days or so additional in the FFX-F spread – that’s closer to 1/4 of a meeting. Take a look at the thread and let me know if you have any questions.

    I usually don’t trade FF flies. I see what is priced into each Fed meeting and choose the vehicle I like best (ED or FF) to express a relative view between the meetings. You are the second person who I’ve come across who likes to look at FF flies in this “weighted-leg” way. I’m just curious where you learned this approach.

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  • Curve Advisor
    Keymaster
    Post count: 612

    Here’s something you need to watch out for when you do any kind of Fed meeting aggregation, and this is very important:

    THE FED MEETINGS ARE NOT FUNGIBLE – you can NOT consider each meeting as equivalent to any other meeting. So you can NOT add consecutive meetings, to compare with other consecutive meetings (as a general rule). This may have been true in the last Greenspan hiking cycle (where each meeting was considered equal in weight), but this is no longer true now. Why? It’s because the Fed now has quarterly meetings and press conferences. The meetings on Mar, Jun, Sep and Dec are typically considered “several times” more valuable. For example, we have:
    Sep 7.8bps
    Nov 0.8bps
    Dec 7.2bps
    Jan 2.7bps
    As you can see, there is a clear pattern of the markets favoring the quarterly meetings. And in the case of Nov, it is a week before a major election, so that is going to be considered a “high hurdle for a move” meeting. So when you start looking at flies and start weighting the legs by the number of meetings, you may get a very jagged curve. Trying to smooth these out without factoring in what is going on at each meeting is going to give you bad results.

    • bambam
      Participant
      Post count: 24

      This is a very good point.

      I have been adding consecutive meetings.
      I understand what you are saying regarding the HMUZ meetings given that they have a press conference.
      This would make my X-Z-F fly structure very biased.

      However, this is what the market is thinking, there is nothing that says that this will always be like this, whats the point of having 8 meetings per year if only 4 could bring some action?

      Yesterday’s minutes show that the FOMC is very focused on being very clear in what they communicate to the market. I think it will be very important to see how they will eventually manage this issue.

      I totally agree with you, and structuring trades ignoring that pattern is silly. Front of the curve, your logic is sound, but would you agree that this logic has to eventually fade? and go back to the “Greenspan” style where all the meetings are live meetings.

      If so, then this could offer opportunities to “smooth” the curve.

  • Curve Advisor
    Keymaster
    Post count: 612

    At some point the logic could fade. For example, July is priced at 5.5bps, which is fairly healthy for a non-quarterly meeting. This is because June is a little early for a hike (after the weak Q1), and we have Brexit a week afterward the June meeting. As Dudley said last week, “if you wait a meeting, it doesn’t have much consequence.” There is no rush at any given meeting. If this is the case, it also pushes the lean slightly towards moving at the quarterly meetings, when every one will have updated their projections and there is a press conference.

    But for now the Fed only does quarterly projections and has press conferences every quarter, so the market pricing for quarterlies vs non quarterlies probably won’t go away unless they needed to hike more “regularly”. It’s hard to see that case right now. However, this does not mean there aren’t opportunities on the FF curve – it’s just you have to think about the case for each of the meetings relative to the other meetings.

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