Project Description

[Trade F16, April 4, 2016.  Yes!  I do trades with only 2 legs as well!]

The FOMC minutes tomorrow may not be as dovish as the statement was perceived. Some of the qualifiers (i.e. “many,” “most,” etc) should show some hawkish sentiment since many of the Bank Presidents came out hawkish. I’ve been eying getting short for the Dec meeting for a while now, because that is my #1 candidate for a hike this year. Here it is:

Buy EDU6-Z6 spread @ 6.5 (7 settle)

It is offered there now, so you may be able to get 6s. Reasons to do the trade:

  • This was my #1 prospect for a Fed hike. I need to have more direct exposure to this view – especially since I think the markets think the Fed is more dovish than it actually is. We get Fed minutes tomorrow, and I think it’s possible (not likely, since Q1 GDP is so low) we get the balance of risks put back in at the April meeting.
  • 7bps of this spread is the year-end turn. This lowers the downside a little.
  • The 10th percentile observation for this in the last 3 months is 2.8bps. After you factor in the turn, it’s only 3bps away, while the upside is almost double digits.
  • The 6mo low for this trade is 1.5. The main difference between then and now is that I feel like earlier this year was a short squeeze, but now people are getting (too) long.
  • EDZ expires before the Dec meeting, so you can actually hold on to this for the meeting. It is somewhat rare for a quarterly ED to settle after the FOMC meeting.
  • The 2016 year-end turn is 3 days. Not a big deal, but it fulfills my “get long turns” objective for the portfolio.

I like buying 3 of 6 units here, and scaling in below. I will probably look to hold at least 50%, until the spread gets between 10-15. The other 50% I will range trade.

Let me know if you get them (and the level), and I’ll send you any updates.

[This was sent to clients on April 4, 2016.  Profit was taken April 20 and May 23.]