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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Clappy who wrote (3486)	12/16/2003 8:16:45 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

I have no idea what lock limit down on eurodollars would be but It sure would not be pretty to my account, nor would I be protecetd for it (with all the plays I have on right now) The only realistic way I could see for that to happen is for the FED to decide out of the blue to just hike interest rates 1/2 point with no warning. Just not gonna happen IMO so there is no need to worry about it. Note: eurodollars at 0% implied interest rate woulkd trade at 100. at 1% expected rate they would be 99.00 To figure out implied intereest rate subtarct eurodollar futures from 100 and add .18 (there is about .18 or so of "vigorish or whatever" so on the 1% FF rate you would see 98.82 actually if no hike was expected in the next 3 months). As for an example: I managed to get the Sept 2004 98.00/98.25 call spread for 8 points. Each point is worth $25. I bought 32 of them. Assuming one did not have futures or short puts or any other plays on, there would not be a problem of losing any more than I paid for the spread. 32825=$6400 Eruodollars bounced up down and all around over the last couple months but when we hit 98.20 the other day that spread was worth 16. Now I can keep it all the way till sept 2004 to make 25 basis points(98.25-98.00=25) or I can cash it out or I can do what I did. I decided to sell them all but buy 10 futures at 98.20 and write 10 ITM 98.00 covered calls against those futures. (This is not exactly what I did but it is close enough for an example). I received 50 points for the covered calls. Not bad HUH. Now I pocketed 22825 profit=4400 and I gave myself protection all the way down to 98.20-.50 on the futures or (97.70). Notice that holding the original position I would lose not only the 4K of profit I had but the origional $6400 as well-IF eurodollars were to close in sept at 98.00 or lower - YUCH. (NOTE: my original spread play went almost immediately from 8 to 14 in value and I did not pull any off and then it dropped all the way back down to 9 and I was really kicking myself. When it hit 16 again I had the above play worked out to sell the spreads and buy 10 futures with ITM CCs). At any rate I am now in 10 futures with 50 points of coverage and if we keep on rising, I will pocket 30 points of that coverage on 10 contracts (remember 20 points was ITM with the future bought at 98.20 and CC at 98 sold against it). Let's see... 103025=7500 and my coverage is now way down to 97.70 Not bad. Technically my losses are unlimited now however, if one really believes interest rates are goona head to the moon between now and next sept, but I like to think I improved my situation dramatically. Note: the only reason I got those 50 points for the CC was sheer dumb luck. I called my broker and told him to buy futures and sell the spreads. 10 seconds after I bought the futures, but before the spreads were sold, eurodollars soared 7 points on the news that I posted here and I sold CC's for 47 points instead of 42 (47 instead of 42 was just dumb luck - I used 50 as an example earlier for ease in understanding). If you buy spreads you have a known predefined risk regardless of what happens. There were all sorts of plays where you could triple your money on tight spreads but they vanished after I did that play. I have been searching all up and down the eurodollar option chains for another chance at that but can not find any. I went to buy six that morning at 12 basis points but when the ask came back at 8 BPs I bought 26 more of them. Eurodollars have some anomolies that one must understand. Kinda complicated really and it took me quite some time to figure it out. In a short nutshell, the the expiry of the March contract (eurodollar futures will be priced in anticipation of what the FED funds rate will be in JUNE). Why it is structured this way I have no frigging idea it just is. That means, at expiry you are really betting on what the market THINKS the rate will be 3 months from the expiry as opposed to the actual rate at expiry. YUCH!. I do not like that but that is how they trade. Plus there is about 18 BPs or so difference between eurodollars than the Fed fund rates (assuming no hike is priced in). The DEC eurodollar future which just expired went at about 98.82 or so, as did nov, oct, sept etc. If there is no hike expected in March (looking forward to june) it will expire about 98.80 or so as well. The March eurodollar contract is 98.76 which means you can no longer make anything on it (6bps max). Useless. To make money on eurodollars you have to go far out. The SEPT 2004 eurodollars fell all the way to 97.75 or so but are now up to 98.23 as I type. That is a pretty damn big move and a lot of it happened in the last couple weeks. People were pressing bets about fast rate hikes and got their heads handed to them on a platter. The March 2005 eurodollar future is 97.40 right now (up 4 BPs today) and that implies an interest rate (looking forward to June of 2005) of 100-97.40+.18 or 2.78% (in other words a 1.75% rate hike) NOT GONNA HAPPEN IMO. One can buy the future and sit on it and make money, or one can buy the future and write a CC on it, or whatever. The 97.50 CC is trading for 47BPs ($1175). If you bought the future and sold a CC you would be protected against loss all the way down to 97.40-.47=96.93 Personally I think that is a near lock. Since the future is at 97.40 and the CC at 97.50 (on this play) you can also make 10 BPs of profit in addition to the $1175 collected. 10*25 = $250. Max profit on this play would be 1175+250. Break even is an implied interest rates of roughly 3%. Pocket all the dough at 2.50% or less implied interest rate. Let's go over the gotcha. The only gotcha is that if interest rates are moved up 1% between now and March 2005, looking ahead to June 2005 at the Mar expiry, the market might be pricing in a 50BP hike that does not necessarily occur. If June rolls around and it did not, you do not get your money back. gg Thus, the goitcha is you are betting on expectations looking 3 months forward. It is possible that works in your favor as well (but given everyones expectations I doubt it). A sensible way to play is buy far out futures on a dip, and sell CC's on a bounce. A plain buy write is a bet that rate hike may happen but will not happen as fast as implied. I hope I explained this correctly and I am sure there are plenty of things I do not know about eurodollars. In fact I just ordered a book on it but it has not arrived yet M