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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
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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?
Haha and here I am reviving it almost 9 months later again
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.
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.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,208
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?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,208
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.
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%!!!!!
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!