Paper Portfolio – Feb Update

I run a portfolio on paper to pretend to the other boys and girls in the playground that I’m just like them! I basically restrict myself the kind of size / products my clients do. I take my own firms executable prices for my marks / entry levels. This is aimed at fellow market makers, and you’ll need to have a bit of background in rates markets to make head or tail of it. I would be quite delighted if any of you non market folks would like any of the below explained! Do please ping me. I am (as those of you who know me IRL know) quite pathetically keen to explain things to people! Take advantage.

So in Jan  I eventually closed out my god awful conditional curve trade in USD for a cool 3.2mio USD paper loss. An unmitigated disaster on every level. I lost all the gains from last years exceptionally lucrative long position in 5y2y EUR rates – a good lesson in a variety of things. 5y2y was my core view last year – and there’s no way I should have allowed a position like this USD curve trade, which I marketed to my clients as a hedge against their duration longs, to run into the millions in terms of losses. Anyway, with sackcloth and ashes appropriately donned, let’s take stock of how the open positions are progressing:

*** I wrote this before NFP. After NFP I made some updates. *** denotes changes I made post NFP!

1. Long USDJPY Calls conditional on US 10y rates at expiry <2.61%,  struck at 113.56, ex 16 Mar 15

Now that the conditionality is basically irrelevant with 10y rates at 2%, this one is basically just a deeply ITM vanilla call on USDJPY. It’s therefore bleeding some time value as one would expect and is probably only worth about 1.9 mio USD. These days. I will close this out on any decent spot move higher as there’s just no point in losing any more time value.

+ $1.7mio

*** and check it out! NFP is decent and spot => 119.30! Closed it out. NPV of the USDJPY call was 2.4mio at 6pm Friday. *0.95% for conditionality = 2.28mio… -150k for Closeout margin = 2.13mio. Not bad on 370k Premium outlay!

2. Long of Dual Digi, $1mio if USDKRW > 1120 and HSCEI > 12000, exp 30-Mar-15

Both USDKRW and HSCEI have consolidated after gappy sell offs in mid January, which in one sense is good because it demonstrates that I was right to want to buy the correlation, but in another sense is bad because if they don’t actually go up my trade won’t make any money! No stress as I’ll be holding this one to expiry, but I’ll put a negative mark on it to reflect the fact that I put it on with ATM strikes and we are lower in both now. Assume I’m going to lose my premium on this one.

– $100k

*** no change post NFP

3. Long of $100k/bp 30y Gilts vs Swaps, BPSS30 ticker in BBG, entry -27, target -17.5, stop -34

I still believe in this trade despite nearly crashing through my stop twice in January! The problem is that the swap market in the Uk is so illiquid that any receiving really pushes the 30y point lower, whereas bonds don’t tend to move all that much. I’m happy to still be in the trade after all the volatility. In mid Jan it was marginally in the money but we now stand back at -30.

– $300k

*** no change post NFP

4. Long ***$100k***/bp Dec18 Eurodollar futures vs short Dec19, entry 16bp, target 50, stop 0bp

Still very happy with this guy, it’ll be a slow burner as either Fed hikes and more steepness gets priced into the curve, or they hold off and all the steepness in fronts, reds and greens gets bumped further out. At 16bp I regarded it as a free option on forward steepening, at it’s current 21, I guess I’d not mind a loss limited long via options.

+ $250k

*** How, how, how did NFP knock this back to 16bp??? I Buy another clip. Double position to 100k a bp (coz it’s gangster) . MTM 0 USD post NFP!

5. Long Bond option: 100mio 19-Mar-15 => BTP 08/19 struck at 103.20, for 82cts fwd premium
Initiated 19-Jan-15

We had a big marketing push on bond options at my shop, so i figured as I was pushing them I ought to stick some in the paper book! Unfortunately the volatility in 5y BTP’s was really disappointing, and there wasn’t really liquidity to buy options on 30y bonds. I figured if I couldn’t have duration I’d have credit instead, so went for BTP’s, but with continued worries over Greece it just hasn’t worked out for me. Doubt I’ll get my premium back on this guy. Using Guassian formula I get the below mark, net of the $820k premium


*** no change post NFP

6. In EUR, Sell 100mio 1y7y 0.85% payers, buy 100mio 1y7y 0.435% receivers, expiry 20-Jan-16
Initiated 20-Jan-15

I think that receiver skew in Europe is cheap, and payer skew is expensive. I wanted to be long of EUR Rates going into ECB and given my views on skew this seemed a nice way to do it. Since then the skew part of the trade hasn’t really gone my way and there’s been decent demand for  OTM payers in EUR, this hasn’t worked all that well for the last couple of weeks, but it’s early days! It’ll get there. TBH I picked the wrong tenor. Went for my old favourite the 7y point (can’t be beat for carry) but times have changed unfortunately – the 15y point is now the first moment of the curve.

+ 80k USD

7. Buy 1bio 1m => 2y  USD 0.9 / 1.00 payer spreads for 4.5 cts, expiry 28-Feb-15
Initiated 28-Jan-15

I wanted a cheap punt on a hawkish fed – at 4.5/1 payout ratio this seemed a nice bet. Barring some kind of surprise over the next few weeks I’m going to lose my $225k.

– 90k USD

*** LOL. Lol lol lol. Thanks NFP – you the best. I close out there, doubled my money which is cracking ,it was always a punt.
+ 450k USD

8. “Mystery short spain trade”
Initiated 03-Feb-15

I don’t want to put anything out on this one, as I’m currently trying to put a rather large and important client into it. It’s a zero cost option structure, cross product, that will pay out of spain comes under a Greece related attack over the next 6 months.

*** No big NFP change. It’s complicated anyways… I think I’m in the money… It’s hard to know.

9. Buy JPY 10bio 1 x 2 Payer spread in JPY, 6m => 10y ,  0.6 /  0.81 strikes, expiry 07-Aug-15
Initiated 06-Feb-15

After the big sell off in long JPY rates, it’s possible to put on trades where you make money on another sharp selloff, and only lose money if rates go above the 2014 highs – which with Megabanks on the bid any time yields move higher, seems an unlikely prospect. Hoping that rates just move sideways, and I’ll take profit on any small pop higher.

– 40k USD

*** no change post NFP

Comments and criticisms most welcome! Have it at! Looking at you ACTUAL pm’s out there…


4 thoughts on “Paper Portfolio – Feb Update

  1. Anonymous says:

    re: #4 why do you expect more steepness priced into the curve as the fed hikes? The current flatness suggests the market is pricing the possibility that the Fed may be cutting rates again 5 years in the future. Not an unrealistic assumption given that the “recovery” began in 2009 and the Fed seems to be working from the old preemptive playbook.

    • simplysellside says:

      This is a fair point! However historically the market has a hard time holding cut expectations, and i think with yellen at the helm, the chance of a policy error like this is low. If they actually hike soon, i expect the chance to take profit and in such a case, ill surely look at forward flatteners.

  2. Anonymous says:

    I’m not sure I agree with you that Yellen = low risk of policy error. What does the market really know about her except that she is model-driven and consensus building? 18 months ago everyone was certain that Summers was a hawk and Yellen was a dove and how did that view hold up? If anything, I think one could argue that low policy error risk = reduced term premium = flatter curve. That said, I think the trade is a decent risk/reward alternative 5s30s steepeners. Pairing it with something like 1y30y 1×2 recv’r spreads might be a nice alternative to a hard stop if you’re willing to fade the risk of a sharp rally in the near-term and/or build this into a core position. Thanks for the post and I look forward to hearing about the mystery short Spain trade.

    • simplysellside says:

      I agree we dont know much! However i dont think that even in the us where the pass through is large, a rate rise will do much damage. Theres no compelling evidence that investment follows rates anyway. Im more comfortable therefore to follow precedent where hikes lead to a belief in more hikes.

      Great point about term premium but i think were extremely compressed there as it is non?

      Im wary of those 1x2s as theyve slaughtered ppl in euros.

      Thanks for the really constructive engagement!

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