Wednesday, September 12, 2012

For all those correlation traders out there

I mentioned this stocks vs bonds trade on Friday after the post-NFP short covering event (trade was selling stocks and selling 10Y UST).  Its time to wrap up this trade and take profits.  ES is 3 points higher, and 10yr yields are 14 bps higher.

Just for fun, lets calc the P&L of this trade on 1mm notional.
1mm 10yr notes requires 45k of capital (standard treasury market capital ratio)
1mm ES exposure = 14 ES contracts = 14*4375 = 61,250 CME initial margin requirement

so, $106,250 was the initial capital required to put on a position of 1mm notional (short 1mm 10yr notes and short 14 ES contracts)

If this position was unwound at current levels
10yr + 14 bps  P&L = 900*14 = +12,600
ES + 3 points  P&L = -3 * 14 * 50 =  -2,100

net P&L = $9,500

9500/106250 = 9% gain

not bad for 4 days of sitting on ones hands.


The recent selloff in US Treasuries is wholly accountable to this weeks 10yr and 30yr auction setups.  The majority of those setups are complete (still some last minute setups currently taking place, but they are in the minority) don't let these auctions pass without exiting the short ES and short 10yr UST correlation trade unless you want to have a trade on thru tomorrow's FOMC meeting.  Once these auctions are out of the way, I don't see a significant trend taking us to higher yields.

While I (like most people) am bearish on the US economy in general (its hard not to be with so many people unemployed and underemployed), I don't think fighting the central banks ability to print money (thereby creating inflation in risk assets...aka ES) is the best idea for a day trader.

Also, with the FOMC meeting occurring before tomorrows 30yr bond auction, there's no reason to hang onto the trade thru the FOMC risk event if you don't know what the FOMC statement will say.

The risk of a QE3 announcement  tomorrow (however unlikely i personally may think that to be) makes having this position a "coin flip risk."   That is to say, I don't like taking coin flip risks...especially when I am trading with leveraged money.  I prefer 80% or better risk vs reward ratios...and betting on FOMC statements just doesn't fall into that ballpark for me.

And, just to make my position clear...i think the FOMC will disappoint tomorrow (no QE3)...which should be bearish for both stocks and that gut call would mean keeping this trade on.  However, I've learned my lesson regarding gut calls...they are fun to talk about...but as a rule i don't trade them in my leveraged account.

govttrader out...

1 comment:

  1. How are you going establish short positions for notes? Do you have any levels in mind or just going follow whatever market offers tomorrow?

    I'm thinking if notes take out 132'050 which they tested 5 times for the last month, shorting from that level might be late. They have to fail from higher level, but everybody kind of going to look to sell them. 133'240 would be ideal, but do they have a chance to get there?