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

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To: rubed who wrote (8895)	2/28/2004 9:37:49 AM
From: mishedlo	Read Replies (1) of 110194

I talk about this all the time on my board. I am a huge fan of Euribors and Eurodollars. These are INTEREST rate plays NOT currency plays. The latter I am primarily short puts (generally OOTM incase they really do hike one or twice), the former is perhaps a better buy because I am convinced they cut although hikes are priced in. Futures, calls, covered calls, or short puts all look good to me. I bought some DEC 97.75 euribor calls for 16 points about a month ago that I thought were a bargain. The reason I considered them a huge bargain is because my target on Dec Euribors is about 97.95 or so assuming there is no cut. 75+16=91 so I figured I had a free shot at substantially more money if they cut. As everyone knows here I fully expect a cut by DEC. The target with a 25 BP cut is about 98.20 or so. At that point the calls would be worth 45 points. I figured heads I break even, tails I get a 200% return. I guess I like those odds. Well on the way to this trip, the Dec 98.75 are already worth 24 points now and the 98.00 calls were going for 14. I "locked in" a near but not quite no-loss play by converting the calls I had to a bull spread. I am now in a 97.75/98.00 bull spread that is 5 points ITM and my basis is 2 points. Even if they do not cut I should make 100% on this play now (assuming they do not hike of course) but I have given up all gains above 98 if they cut. Not to worry, I am buying more calls farther out on the yield cure where I attempt to do the same thing again. The idea is to find a spot where as long as they do not hike you break even, buy some calls and after a runup sell a higher priced strike against it (perhaps on some and letting some run). Eurodollars are a little trickier and there are more cross currents. I would not buy calls at all. You can get 10 points for a sep 2005 94.50 PUT. To lose on this play, interest rates would have to get to 5.25%. That idea is absolutely preposterous to me (but possibly not to Russ or some of the others here). I am short all kinds of stuff like this, and I just covered so Sept 2004 Puts that I collected 13 points for and I covered at 2, and rolled out further. The idea is that IF hikes come they will come far slower than expected. The idea on Euribors is that they are not coming at all. On Thursday I got 11.5 points for short puts on Dec Euribor 98.50. Since we are at 98.80 and since I think a rate CUT is likely, I considerd that to be "free money" I did a post on that on my board and said I was scooping some up. There is no better bargain out there IMO than betting that rates do not go up (as outlined above). Euribors are probably safer at this point. BTW a point is $25. and a move from 98.75 to 98.00 is 25 points. 25*25=$625 per future, option or whatever. Tne advantage of calls on Euribors is that you have a guaranteed max loss. You do not have that with futures or short puts. Finally the unit is $25 per in US$ and because of where Euro is now it is more than that $32 (in US$ terms) or so in when priced in 25 Euros. As to what else. Silver is a lot stronger than gold but very very volatile. I like gold but am out of the market now pretty much, expecting a rate cut from Europe and I think it gets hammered on that. Japan also closes its book for the year on March 31 and perhaps they stop buying so many US$ for a while after that. I am looking at a mid-March timeframe perhaps to get some miners. Mish

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