CobblersAwls 

@SMCJB and @adam777 I've been mulling this over and have come up with one way of trying to identify some of the premium baked into the turn. Let me know your thoughts and if you think I may be close but not quite right, or just plain off the mark. (Edited to Add) If we can assume that EDs are Fed Funds + libor spread + counterparty risk premium, and the turn risk appears in the Fed Funds and bleeds into EDs, could we try and isolate that somehow by spreading EDs vs FFs around the turn? Given that spreading EDs vs FFs is done like so: (FF are 30day rates, EDs are 3m hence different dates) I created the following: Firstly, the 'Spread' is the ED price vs an average of the 2 FF prices. The Z-Turn bps is the premium around each Dec contract, for example, for Dec 2019 where the Z-Turn is 3bps, it is calculated by spreading the 'Spread' around it (U19-Z19-Z19+H20). Thoughts?

Sep'19 Eurodollar settles based upon a 90 day loan starting on 16-Sep-19, so while your approximation of Sep Eurodollars vs Oct & Nov Fed Funds is probably good but wouldn't 1/6 Sep, 1/3 Oct, 1/3 Nov, 1/6 Dec be an even better approximation? (In reality its probably closer to 0.1/0.4/0.4/0.1). Expanding your analysis using current rates I get



So it looks like the VXZ fly is 0.016 to 0.021 too cheap, the XZF fly 0.088 to 0.082 expensive and the ZFG fly 0.022 to 0.027 cheap. So even if we say GEZ9 has a 0.025 "turn premium" the XZF fly would still appear to be 0.041 expensive versus the surrounding flys.

In case your curious, if we expand your 10 GE = 6 FF to be 10 GE1 = 1 FF2, 2 FF2, 2 FF3, 1 FF4, then 10 GE XZF Flys would only equate to -1 FFZ, + 1 FFG, +1 GGH, -1 GGK as much of the FF exposure offsets!

Of course the problem is, if we say the 'turn premium' is 0.04 instead of 0.025 then XZF looks fair and VXZ and ZFG look wrong! So to be safe you would need to spread VXZ vs XZF and XZF vs ZFG. Now you need 40 lots of GE Flys (160 lots total) but your FF expsoure still mostly offsets leaving you with just -1X, +2Z, -1G, -1H, +2K, -1M. I wounder whether people actually do trades like that?

SMCJB 

Ha. Couple of days! So here I am @adam777 and @CobblersAwls one year and eight days later!

Haha and here I am reviving it almost 9 months later again

Quoting 

I have a Real Vision subscription which I find very informative and educational. Founder, ex Goldman Trader, ex Hedge Fund Manager, and Global Macro Insiders Founder Raoul Pal has done several really interesting interviews in the last few months and has been extremely bullish Bonds and more specifically Eurodollars.

He certainly did well recently! Although I'm not sure anyone could have predicted it would be a global pandemic that was the straw that broke the camel's back.

Quoting 

I must admit that I never got much further on my Eurodollar analysis but have actually been trading some Eurodollar flys and double flys. Things were going very well last year until December and the Powell Pivot, where I lost a lot of what I had made in the year. Thankfully in January I made that all back and some more but I've done very little since. *Alex Manzara is apparently a Eurodollar broker with RJ O'Brien. I bought some EDZ9 futures, and EDZ9 call spreads this week.

How did you get on with these spreads in the end, and spreading EDs in general? Be good to start looking at these again and getting some open discussions going.

I actually stopped trading Eurodollar spreads and Butterfly's in Q2'19 and started trading outrights right before the July Fed Meeting. It was a nice ride but I got out a little to early and was also actually a little short vol at thd end. So i did well, but not as well as I could, and then I gave about 10% back on the short vol. Disappointing I didn't do better but still an excellent trade.

Nice to see you post again @CobblersAwls


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SMCJB 

I actually stopped trading Eurodollar spreads and Butterfly's in Q2'19 and started trading outrights right before the July Fed Meeting. It was a nice ride but I got out a little to early and was also actually a little short vol at thd end. So i did well, but not as well as I could, and then I gave about 10% back on the short vol. Disappointing I didn't do better but still an excellent trade.

Interesting, why did you move away from spreads, was that because you found them too costly or risk too high for potential reward?

I've been looking at outrights, in particular the H2 contract, which is currently trading at 99.65. Unless rates go negative in the US (unlikely but not impossible) then it gives an almost 2 year timeline for rates to equal >= 0.5%. I think vol premium would be pretty punchy, but might be worth shorting some outrights. Could also cover by purchasing some calls at strikes > 100 that I would presume might be cheap.

Worthwhile looking at spreads again would you say?

CobblersAwls 

Interesting, why did you move away from spreads, was that because you found them too costly or risk too high for potential reward?

I really wasn't doing that many spreads, and while I was making money it wasn't significant PnL. I didn't have the time I expected to look at so when I started making my directional trade (options not futures) I just thought it would be cleaner to close out the spread stuff.

CobblersAwls 

I've been looking at outrights, in particular the H2 contract, which is currently trading at 99.65. Unless rates go negative in the US (unlikely but not impossible) then it gives an almost 2 year timeline for rates to equal >= 0.5%. I think vol premium would be pretty punchy, but might be worth shorting some outrights. Could also cover by purchasing some calls at strikes > 100 that I would presume might be cheap.

I didn't think they'd get above 99 and I was very wrong. Raoul Pal has openly said he thinks they are going to 100 but I think he's also said he doesn't think the Fed goes negative. So how could they both be true? How about if the fed expands their balance sheet so much, could the FRA-OIS spread (eurodoller vs fed funds spread) go to zero? If so Eurodollars could definitely go to 99.935 which is where Fed Funds futures trade for the next 8 months. Eurodollar vol is CRAZY right now! H2 100 Calls settled 14.75. Now you've gone from thinking about buying them to "Hell if I sell those I only lose money if eurodollar futures go to 114.75 which would imply a Eurodollar (not Fed Funds) rate of -0.15%!!!!!

CobblersAwls 

Worthwhile looking at spreads again would you say?

I would have thought that with this volatility that there were oppurtunities... thats definitely the way it works in crude... but the curve is so flat I'm not sure there is.... unlike crude when June23 is trading double May 20!