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  • Curve Advisor
    Keymaster
    Post count: 612
    #1578 |

    People new to ED futures may not be aware of 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. So whenever you are stuck, think about all the things you can do with EDs:
    1. trade directionally
    2. trade spread
    3. trade curvature (i.e. fly, condor, etc)
    4. trade double flies
    5. trade ED vs FF to express spread or meeting
    6. trade ED vs other STIRS
    7. trade ED vs swaps (convexity trades)
    8. trade ED vs treasury futures or cash
    9. all of the above, using options
    10. and the entire universe of trades you can do using just options (flies, risk reversals, etc)

    So the next time you are stuck for trade ideas, think about the above. And I’ve probably left out a few things.

  • Curve Advisor
    Keymaster
    Post count: 612

    Those are the tools. But you need some thoughts to use those tools on. In the Nov 16 issue of the CA newsletter [link to article to follow], I outlined three types of trades I like in a portfolio in the current environment:

    I. SOME FORM OF CRISIS PROTECTION TRADE. See the “Always have your book be long carry and crisis” thread. The front end of the curve has a lot of hikes priced in, and so the OTM call structures will be cheap. We also have the threat of terrorism around the holidays, as well as a recovery that looks a little more fragile than in the past.

    II. A LIFTOFF TRADE. This will depend on your your view. However, whether your view is no hike, Dec liftoff or March liftoff, you can probably find an above-average risk-reward trade to fit your view.

    III. A TERMINAL RATE TRADE. There is a wide range of views on (1) when (for example, “end of 2017”) AND (2) at what rate (for example, 3.5%) the Fed will end its hiking cycle. You can take a view on one or both of these things. Whenever there is uncertainty, the price of a particular view (if you have one) will be cheaper-than-normal.

  • Curve Advisor
    Keymaster
    Post count: 612

    Here are some other things you may have a view on:

    * SOME FORM OF CARRY TRADE. A hiking environment is generally not conducive to carry trades, but this does not mean there aren’t any. Have a portion of your book make money “passively” make on rolldown or decay makes sense. See the “Always have your book be long carry and crisis” thread.

    * A VIEW ON SPREADS. We are at an interesting time where shorter term swap spreads are positive but longer term swap spreads are negative. This may not be a long-term equilibrium.

    * LOOK AT THE TAILS. The markets typically underprice the tail probabilities. Consider both the downside and upside scenarios on rates. Think about what the curve would look like and consider trades that offer good risk/reward relative to the status quo.

  • Curve Advisor
    Keymaster
    Post count: 612

    Let’s say you are bearish. Here are some of the things you should be thinking. This assumes the markets are not moving and you have the time to think things through. In fast markets, you should just get the short exposure on. However, once you get used to start thinking about the various alternatives, you can train yourself to go through your alternatives in a very short amount of time.

    STEP 1 (single contract). You can always just sell a futures contract. This is the simplest, easiest way to get a bearish view on. However, you still need to determine which contract is best. Depending on the rate environment, The contract that will move the most on a selloff is not always the best one. Rather than think in terms of just absolute magnitude (the trade where you make the most amount of money per contract), think about the risk/reward of the scenarios outside of your central one (i.e. the scenario where you are wrong, or may not be right). Sometimes, a better contract is the one that moves less on a selloff, but loses relatively less on the scenarios where you are wrong. You can always size up on this trade to make the same amount of money as if you chose the contract that moves the most.

  • Curve Advisor
    Keymaster
    Post count: 612

    [I will move this up one post at some point]

    Good trades can usually be found on the curve in the context of your view vs the market’s view. If you want to find a good trade, the FIRST thing you need to do is determine:
    * is the next move (by the central bank) a hike or an ease? how strongly do you believe it? why?
    * if a hike were to happen according to your view probability distribution, when would it most likely occur? How many hikes would there be, and how often would they occur?
    * if an ease were to happen according to your view probability distribution, when would it most likely occur? How many eases would there be, and how often would they occur?

    Based on the above, you can mentally construct where your “personal” yield curve should be. Think of this as your own dot-plot (but better than the FOMC track record). Your curve will vary from the market curve. Where you see the most variation between your curve and the market curve is where you focus on for your trades. The key is, you want to pick the trades that make money if your view occurs, BUT loses less money if your view does NOT occur. That’s where a lot of the charts come in handy.

  • bagua
    Participant
    Post count: 10

    With respect to arb type plays across the curve and your carry ideas say long in the 18 area of the curve do you then look at shorter term plays like you have alluded to before in selling flys that are fully priced like M16 or the whites.

    I used to tend to avoid the front but in\eurodollars the SFE fifo market its the only spot where you can often get some movement
    Eurodollars are substantially more liquid and easier to leg than a market like SFE where que position and a single large player can dominate .

    I do like your weighting principles also such as 2 * flys in the front to take advantage of roll down or roll up.
    In a move like we have had in the past week I think its a classic example of where you can be right but scaling is critical ie when the m16 6 month sold off a few weeks ago then bounced if you went all in at 4 or 5 you may have run out of ammo now to sell 8s and 7s .

    Today has been interesting in the whites as they seem fully priced yet h17/18 basically cant steepen maybe a clue of more to come over the next few days and the FOMC.

    By my way of thinking the oversize move in the first 6 month fly present more than a few opportunities in the adjacent s let alone v the backs . I suppose that all comes down to 2018 expectations whcih are a long way off .

    Great forum

  • bagua
    Participant
    Post count: 10

    I suppose in context when the fed went in dec 15 the 6 month front white fly was trading at a considerably lower rate than we are now Is that a case of the market getting too far ahead of itself again in the whites seems to be a very large divergence.

  • Curve Advisor
    Keymaster
    Post count: 612

    I’ll reply to this tomorrow. That other reply in the Canada thread took a lot of time.

  • Curve Advisor
    Keymaster
    Post count: 612

    I’m not sure if you looked at the “Value on Curve” page (http://www.curveadvisor.com/value-on-the-curve/), but #3 and #4 are plays in the whites (and I may be adding another one). It’s interesting you mentioned the M6 6mo fly because what I focused on this week in my commentary was how the meetings in Q2 and Q3 seemed high relative to the meetings in Q4. And a few weeks ago, I talked about how Z6-Z8 was not particularly steep (which corrected last week). So we’re mostly in agreement about where the value is – that the earlier meetings seem high compared to the meetings further out. As you mentioned, timing is critical. I think selling the M6 6mo fly could be okay, but my view is that the U-Z part is not the part that is mispriced. I did point out that M6 6mo double fly was at 1 year highs (turn-adjusted and constant maturity), but because I like U-Z, I haven’t really looked seriously at selling M6 6mo fly (or double fly). Keep in mind the year-end Z turn is probably worth about 0.7 bps. I suppose the risk to this view is a “one-or-two hikes and done” scenario. I don’t think the Fed is going to rush in this environment, so I prefer owning some of the later meetings.

    Whenever you think there is value in a part of the curve, the big decision is how to allocate your view over the various trade alternatives you have. This is especially important as we approach the Fed meeting. I think there are merits to having the view in a few ways (i.e. diversifying the expression of your view). I happened to pick selling M-U vs further out the curve, and I suppose I could also include the June meeting (which M-U neglects). Historically, this trades about the same as the ED1 6mo fly. I think we could gravitate towards the EDU 92 strike the next month or two. And some kind of overweighted conditional call structure could also make sense. It’s good to have a lot of choices, so you can pick the one(s) that fit your view best.

    Glad you like the forum. Tell your friends!

    • bagua
      Participant
      Post count: 10

      Thanks yes good reply many way to skin a cat I assume you are referring to the M17 area in the 6 months.

      Cheers

      • Curve Advisor
        Keymaster
        Post count: 612

        I am not sure what you mean by “referring to the M17 area in the 6 months”. I guess you meant as the back end of a double fly? Whether you do a M6 6mo fly, or M6-Z6 6mo double fly, or M6-M7 6mo double fly, or some kind of condor (all weighted or unweighted) are all about the same. The best one really depends on your market view.

        The M6 1 year fly got back to 8 bid, so it’s going to chop around a little.

  • bagua
    Participant
    Post count: 10

    One could argue missed the boat in M10 6 month !! another day

  • bambam
    Participant
    Post count: 24

    It seems to be that the only “sexy” curve out there is the aussi one.
    The swissy doesnt look bad either

    Anyone trading those markets, how is the flow these days??

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  • Curve Advisor
    Keymaster
    Post count: 612

    I think there are probably opportunities on most curves, if you are patient. It’s a little harder for me to regularly look at the other curves because some of them are not very liquid (and the time difference), so some of my customers wouldn’t be interested. But the nice thing about illiquid curves is that you get paid for providing the liquidity. Actually if you look at the volume, a lot of those futures don’t trade much after 2 years or so, and the rest is computer-generated. It’s pretty brutal for curve trading when there’s only like a 10-20 bp range in TWO years. If you do “ESA Comdty CT” you can see the volume.

    • bambam
      Participant
      Post count: 24

      Absolutely, say for instance the Canadian rates.

      whites,red and greens trade… but you are kind of a cowboy trading greens to the point that having flies on green legs spike your margin requirements. The greens are mostly computerized like you say, its very hard to be passive and get filled on those, unless they are implied on a spread.

      Any idea on how the “computers” price those?

      • Curve Advisor
        Keymaster
        Post count: 612

        I would imagine they would back out the 3mo rates from swap rates. Burghardt discusses this, or you can do a google search for “bootstrapping futures and swaps” (or equivalent).

  • bagua
    Participant
    Post count: 10

    After trading Aussie curve for 10 plus years I would have to say yes there are opportunities but the are extremely difficult to execute particularly in the bank bills.
    Being a FIFO market que is absolutely essential . The SFE market is proliferated with que holding algos which if you are patient you can avoid .
    Couple with that the fact there are one or two particularly large asian based traders who essentially have the power to distort the market you have to be very very careful.

    saying that if you can trade SFE well the Eurodollar is a peice of cake

    Cheers

    • bambam
      Participant
      Post count: 24

      Hi bagua,

      Why would you consider the FIFO a disadvantage? This is actually very good if you are trading it full time, kind of like trading BA’s.

      I struggled a lot with eurodollars because of the prorata.

      Regarding the large Asian players.
      To distort the market in what sense? outrights or flies?

      • bagua
        Participant
        Post count: 10

        FIFO is very attractive but its getting fifo yes you can have great que and he will come in and lift or hit the market and has the ability to hold it there for a session or two just enough for you to puke then see it head your way.
        When you have size on it can hurt but the flies its a guy who is doing large very large size ie 10,20 ,50K

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