Nailing it on U.S. employment day … better be lucky than smart
My futures broker was calling to congratulate me for putting on the TYQ3 put condor before the economic figure release … but with humility, I told him I was probably more lucky than smart as it is really a coin toss to bet on such a economic figure like this. All I know is cheap option structures sometime exist like in a casino if you count the cards and it becomes compelling to place a bet ,,…
Back to such a good number of 195,000 (exp 165,000) change in non-farm payroll with prior month revision of 20,000 to 195,000 and strong private payrolls of 202,000 (exp 175,000) with prior month revision of 29,000 to 207,000; this is as good as it gets above expectations with rise in average hourly earnings mom & yoy too. The key now is whether we get an orderly exit from the fixed income market from the U.S. that will emanate to the global fixed income markets. I seriously doubt that as so much money has poured into fixed income over the last 3 years that the process is painful especially for Emerging Markets that had seen the most inflows into local currency bonds.
Asianmacro will continue to be long DXY futures, long USD against EM currencies and for stocks a relative value long U.S. stocks vs short EM stocks will still make sense with stock picking even more important now.
CONGRATS CHAMP !
Yes. Real investors will have to show up now because stock picking will be even harder than it was in the past 5 years.
Very confusing, were you short the condor spread or long the condor spread?
Thought a long condor spread is a bet that prices or yields will not move much.
Dear Gallen, my apologies if you find it confusing as I’m not a strategist nor economist by background who will waxed lyrical on most finance subject with eloquence but am a rough & tumble trader & risk taker my whole professional life. Looking at my previous post https://tradehaven.me/2013/07/05/its-a-few-hours-before-u-s-employment-report-of-trees-payoff-cheap-optionality/ …. I would have thought that it had been clearly stated following Illustration 2 that I bought the put condor TYQ3 125 / 124.5 / 124.0 /123.5 (i.e. buy 125 strike put / sell 124.5 strike put / sell 124.0 strike put / buy 123.5 strike put) together with the payoff diagram.
If you have a derivatives background, you will also agree with me that there are infinite ways to construct as many variation of option structure or payoff that you desire with different characteristics depending on the greeks (*gamma, vega, theta, delta & other higher order) profile desired & your comfort in managing them to expiry. In this case, as mentioned in that posting, ex-ante before U.S. payrolls releases, 10-years UST yields was 2.50% and I envisage a rise / move 20-30bp either way (with more than 50% of the move occurring within the next 2 trading days ex-post & the rest of the move over the next 2 weeks as explained previously) depending on what comes out (*although my bias was for rates to rise).
So buying this put condor while it is really cheap will enable my view to be monetised where yields rise to a 2.75/2.85% region and stays around there at expiry for max-payoff. I will not make anything beyond 3.00% thereabout if yields continued higher. This will be in-line with my overall portfolio management where typically even if I was short TYU3 futures & paid rates in general, with such a big move higher in rates already … I will take off at least 50% of my positions in rates that I have before U.S. payrolls release.
It is stupid at least from my perspective to risk it all on a figure release that can easily go either way although I might have my bias. I will use the put condor to replace the 50% that I have already crystalised as profits so that if rates continue to head higher to around 2.75/2.80% (which I think is a reasonably strong resistance area) before gyrating around there for most of July thereafter, I will still enjoy the equivalent upside (that I have previously taken profit on 50% of my rates positions) but now replaced by the put condor. If the U.S. payrolls actually turned out to be weak and rates actually fell to 2.2/2.3% instead, I would have already taken profit on 50% of my positions & I have more appetite to re-short & be paid rates again in futures or swaps (while the put condor bought was really dirt cheap which I will not be bothered at all).
Hope the above clarifies & appreciate your feedback. Do kindly share your thoughts in future on anything that I might post.
Dear asianmacro, thanks for the detailed explanation, I am hopeless in derivatives but looking at your payoff diagram, I get a better picture, yours is a downside put condor so it is structured such that you make more $$ when 10Y futures prices fall (yields increase) and still make money if futures prices remain unchanged between unchanged between 124 and 124.5.
I was confused because from what I read, put condor spreads only make $$ when prices remain unchanged between the 2 puts sold in this case 124 and 124.5 and lose $$ in all other price scenarios.
Those theories are based on the assumption of basic call or put condor spreads structures.