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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: eddieww who wrote (3715)	12/21/2003 1:36:43 PM
From: mishedlo	Read Replies (1) of 110194

I'll second KyrosL on the thanks for the explanation of the eurodollar market. I knew very little and now I know much more. Bear in mind that much of what I learned about Eurodollars came from someone on my board on the FOOL. I am not positive that what I explained is exactly correct, but I am sure it is close enough. I just ordered a book on it to make sure I know absolutely everything I need to know. One thing I found out (thru a bad experience - but it ended up OK) was that eurodollar optoins in January are really tied to the March Eurodollar future not the January Eurodollar future. Options are always tied to the key months of Mar Jun Sep Dec. I put on a January call spread thinking it was on January and was hugely underpriced. Well It really was a bet on the March contract and March Eurodollars are really an expectation of what rates will be in June. Ugh. All of a sudden PIMCO and Hussman and others come out calling for hikes and I am getting crucified in that play with little time for the market to prove me right. Value in my acct plunged. Fortunately, this has all been recovered and more and I bailed on the play for a small profit. On Eurodollars you need time for the market to move in your direction and I leveraged into a Jan 04 play with precious little time in it. June of 05 is now in the fat part of the curve and March June and Sep of 05 is where I would recommend spreading some plays on a rolling basis going forward. If we get a dip, a really good play IMO is to bet on no rate hike before the election in Sept 04 Eurodollars. Right now it is nearly fully priced and I prefer a lot of cushion if I can get it. I am under the assumption thatb the market will THINK that a 1/4 to 1/2 hike will occur after the election and thus the Sept eurodollar contract looking forward to Dec might very well be 98.25-98.50 at expiry. If it is indeed 98.25 then there is little money to be made there. On a fall to 98.10 or so, one might be able to get a good price on futures with 98.00 ITM CCs. My expectation is that Sept Eurodollars will close about 98.50 or 98.60 discounting about a 1/4 point rate hike (a hike that will in fact not happen but will be priced in). If the market decides to price in a .50 hike instead, there is no money at all to be made on the futures, but money can be made on Futures with CC's, or by shorting the appropriate put. As expectations of hikes diminish Eurodollar futures will tend towards the number 98.82 or something very close to that. The far out months will tend towards those numbers and slowly over time head there, just as Sept 04 moved from 97.80 to 98.20 (where it is now) and ultimately IMO to about 98.50-98.76 if I am right. Mar 04 is 98.76 right noiw and offers NO play. M

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