Home Forums Main Forum CA Trades Newsletter Questions

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  • Mike G
    Participant
    Post count: 20
    #3733 |

    Hi Joseph,

    I have a couple of questions from your Newsletter:

    1) What do you mean by buying cheap crisis protection? Does that mean shorting the outright futures? Or are you suggesting some option structures that are under priced? Can you give me an example?

    2) Note sure if this relates to the above but what do you mean by “Look at cheap tail/blowout trades”?

    3) What do you mean when you say long carry? I understand this means that I should aim to look for structures that pay even if the underlying market doesn’t move (as you mentioned in your “always have your-book be long carry and crisis” thread). An example would be long outright ED futures (but what about spreads?)…but how do you quantitatively define carry so that you can determine which trade has more carry vs another? (or is that possible)?

    Thanks,
    Mike

  • Curve Advisor
    Keymaster
    Post count: 612

    It seems all your questions are related to the “Value on the Curve” and “Value on the Horizon” sections. Those are just general themes I have actually suggested trades on, and things I am still thinking about (respectively). As for your specific questions,

    1) On the Trade table, the “Type” column will indicate what type of trade it is. You should look at the “Crisis” trades. Note that there are two types of crisis: (1) where the Fed may have to ease, and/or (2) where libor blows out. There is only so much information I can convey with a one word descriptor, so if you ever have any questions, ask me. There are a lot of nuances to a trade. The options structures are generally “zero cost”, but some of the futures trades we like anyway will have some crisis protection. Shorting the futures outright (say in FF) would generally perform very poorly in a crisis.

    2) That was on the Value on the Horizon section, and since vol is on the low side, I have been on the lookout for a cheap way to make money on a blow-out selloff that Gundlach, etc have been predicting. I think they are *currently* wrong to predict this, but I like looking at cheap tail plays.

    3) I should have said “roll” instead of “carry.” You don’t actually earn anything by holding a futures trade (as you would by owning a bond). But “roll” or “slide” is just the hypothetical amount you can earn if the curve was unchanged in 3 months (and each of the contracts moved to the contract in front of it, with the current front contract pricing). The reason we look at this is because “nothing” happening is always going to be a reasonable probability scenario. For a year spread, you just look at the year spread 3 months in front of it and see if the position pricing is favorable or unfavorable.

    Let me know if you have any questions.

  • Mike G
    Participant
    Post count: 20

    A few questions:

    1. What does it mean when you label a trade to be “DK”? What about “Neutral”?

    2. In the January 8 news letter page 2 you sent me there is a table on Fed Meetings pricing. How do you derive those numbers? Are you just taking the respective Fed Funds Outright futures contract and backing out the implied rates?

    3. In your last answer to my point 3 you said: “For a year spread, you just look at the year spread 3 months in front of it and see if the position pricing is favorable or unfavorable.” How do you define position pricing? So if I am looking to get long Z8-Z9, I would say it will have favorable “roll” if the price of U8-U9 is greater than Z8-Z9? The reason being if nothing happens, I would assume the Z8-Z9 to roll up in price?

    Thanks,
    Mike

    • Curve Advisor
      Keymaster
      Post count: 612

      @mguan said:
      A few questions:

      1. What does it mean when you label a trade to be “DK”? What about “Neutral”?

      2. In the January 8 news letter page 2 you sent me there is a table on Fed Meetings pricing. How do you derive those numbers? Are you just taking the respective Fed Funds Outright futures contract and backing out the implied rates?

      3. In your last answer to my point 3 you said: “For a year spread, you just look at the year spread 3 months in front of it and see if the position pricing is favorable or unfavorable.” How do you define position pricing? So if I am looking to get long Z8-Z9, I would say it will have favorable “roll” if the price of U8-U9 is greater than Z8-Z9? The reason being if nothing happens, I would assume the Z8-Z9 to roll up in price?

      Thanks,
      Mike

      1) A “DK” stand for “don’k know.” Basically, it’s a trade that never got filled (moved away). So I suppose it was a good trade idea, but the entry level was not aggressive enough. A “Neutral” trade is any trade that is within 1bp of P&L. Basically a trade that neither made or lost a noticeable amount of money. But I suppose most of the time, if you do enough flipping, you can eke out a small gain.

      2) I have a Thread called “Basics: What is Priced Into Each Fed Meeting” that discusses how to calculate the numbers.

      3) Yes. It’s a very crude measure of what could happen if “nothing” happens. We look at this when the status quo is a reasonable probability outcome.

  • Mike G
    Participant
    Post count: 20

    I just realized that you answered my question 2 in “Basics: What is priced into each Fed meeting?”. Reading your answer, I have a follow up question:

    Let say I want to determine the current pricing of the May Fed meeting. As of 2/25/2017, the settlements are as follows:

    FFH7 = 99.305
    FFJ7 = 99.275
    FFK7 = 99.195
    FFM7 = 99.145
    FFN7 = 99.105
    FFQ7 = 99.07
    FFU7 = 99.04
    FFV7 = 98.985
    FFX7 = 98.955
    FFZ7 = 98.89

    Wouldn’t the implied May fed meeting be just the spread FFH7 – FFK7?

    In your Post #1601 in the other thread you said for non quarterly meetings: “You just take the [spread of the two futures between the quarterly futures] and divide by [the fraction of the meeting in the spread].” So I should use FFJ17 and FFN17? I don’t follow why we don’t use the FFH17 futures contract since the interval between the March Meeting and the May meting is what we are trying to derive a rate from. Just using the FFJ17 misses the information contained in the FFH7 contract.

    Would the following calculations make sense? There are 49 days between the March and May meeting (March meeting = 3/15/2017 May Meeting = 5/3/2017). There are 91 days between when the March Futures contracts start to trade and when the May contract expires. May pricing then would equate to (49/91) * (FFH7 – FFK7).

    Thanks,
    Mike

  • Curve Advisor
    Keymaster
    Post count: 612

    The May meeting is on May 3. So the first contract that would be affected by the new rate would be FFK7. 28 of the 31 days in May would be affected. There are no meetings in April, so that is a “clean” contract. The FFJ7-K7 spread would contain about 91% of the May meeting (since only 91% of the days of FFK7 has the new rate, and 9% has the old rate).

    I think there is a little nomenclature confusion:

    “quarterly meetings” are the March, June, Sept and Dec meetings. These meeting dates usually correspond to the IMM dates (maybe 3 of the 4 meetings each year). An exception this year would be the Dec 2017 meeting, where the IMM date is the following week. The EDs use IMM dates for settlement, fwiw. These meetings also have press conferences.

    “non-quarterly” meetings are the other 4 meetings per year that are in between the quarterly meetings. These usually fall around month-end/month-start: Jan/Feb, Apr/May, Jul/Aug and Oct/Nov.

    The FF contracts are an average of the FFERs during that month. So you need to look at what meetings fall within each FF contract. Then when you take the difference between FF contracts, you can figure out what fraction of any FF meetings are include in that spread. FFH would contain about half a March meeting. So when you look at the FFH7-FFK7 spread, you would be looking at roughly half a March meeting and 91% of the May meeting.

    You should try and recreate a table similar to the one in this post: http://www.curveadvisor.com/forums/topic/basics-what-is-priced-into-each-fed-meeting/#post-1149. This will help you visualize what is contained in each FF contract.

    Let me know if this post and the replies in the “What is priced into each Fed meeting” thread haven’t answered your questions.

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