Project Description

[Trade F33, November 6 (pre-election)]  We had a noticeable flattening in Z6-Z7 spread over election worries.  I want to play this as a bimodal event – either we price in a skip in Dec, or Z6-Z7 goes back to the highs.

** Sell EDZ6 99.125 put vs Buy 0EZ7 98.875 put @ -3

Alternate: Sell EDZ6 99.00 put vs Buy 0EZ7 98.75 put @ 0.5

This traded -3 on Friday and the 0EZ7 put traded 5.5, so this was doable.  Reasons to do the trade:

  • On a soul-crushing rally, all the calls should be noticeably OTM. This should allow us to pick up some P&L.  This is especially true if we get serious terrorism.
  • On a large selloff, EDZ6 downside is capped (1 hike max), while EDZ7 is not. The post-Treasury Rule low in EDZ6 was 99.03.  The low in EDZ7 is 98.83.  The high in Z6-Z7 spread is 22, but there is a chance that could break.  Regardless, just 4 days ago, this structure was at -1 when Z6-Z7 was at 19.5, so there could be some flipping P&L.
  • Even if the Fed hikes, if EDZ-FF spread comes in another 3.5bps, the front put may not settle lower on a hike. I like having a ED-FF spread-narrowing bias.  We need to unwind the 0EZ put before expiry, unless we think Z6-Z7 goes north of 22.

The main thing I hate about the trade that the trade does not carry positively.  In fact, if the Fed looks like they will be 1 and done, this trade could lose 9bps.  However, since I plan to be all over the Dec hike plays if Clinton wins, this is not as much of a concern for me.

The other risk would be if ED-FF for whatever reason blows out.  But this is not my view, and I am looking to fade in the Portfolio.

Do 3 of 6 units and look for a further fixed income rally to do more.  This probably is going to be a “1 week” trade and not expiry trade.

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


[This was sent out November 6 (pre-election).  Profit was taken November 11.]