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1 Here is a post mortem of a Eurodollar trade I have been a part of from late 2018 until this month. I learned a lot in this trade & I thought I would share the details & some tangents with you guys. Plus I get to post big return # s so that& #39;s more fun than whining about a loser.
2 First, some background. I am retail investor trading my family& #39;s money. No outside investors. No constraints. About 65%-80% of my liquid assets are in typical stocks/cash and the rest is in my futures/options trading/hedging account.
3 I trade decent amount of options & VX/X but I am not running volatility trading book per se or doing any volatility arb. Basically I am punting/hedging with options. Since I have a lot of stocks I love trades that are convex and negative correlation vs equities.
4 In early December 2018 I listened to this podcast:
https://open.spotify.com/episode/0RFdTRgAdK9TKxTOOopOHW
I">https://open.spotify.com/episode/0... thought the guy& #39;s argument wrt Fed going to ZLB if the s*** hit the fan was awesome. Remember this is during Powell "autopilot" rhetoric, so no one believes this is going to happen.
https://open.spotify.com/episode/0RFdTRgAdK9TKxTOOopOHW
I">https://open.spotify.com/episode/0... thought the guy& #39;s argument wrt Fed going to ZLB if the s*** hit the fan was awesome. Remember this is during Powell "autopilot" rhetoric, so no one believes this is going to happen.
5 I had never traded a Eurodollar contract before so that night I went to CME site and read the contract specs:
https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_contract_specifications.html?optionProductId=380
After">https://www.cmegroup.com/trading/i... reading these specs I was sure here was a good idea. IV was tiny, very convex, 30:1 if we go to ZLB and negative correlation to equities
https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_contract_specifications.html?optionProductId=380
After">https://www.cmegroup.com/trading/i... reading these specs I was sure here was a good idea. IV was tiny, very convex, 30:1 if we go to ZLB and negative correlation to equities
6 The next day I did my first trade. I put 1.5% of my trading account into Sep 2020 99c and 0.5% into the Sep 2020 100c. Here is a chart of this future around time I bought these options and what happened later:
7 OK, so now let us digress into trade generation.
How does trader generate ideas?
For me it is consuming vast quantities of information. I look at a lot of prices, a lot of charts, I read a lot of 10-K/Qs, read a lot of newsletters, listen to a lot of podcasts.
How does trader generate ideas?
For me it is consuming vast quantities of information. I look at a lot of prices, a lot of charts, I read a lot of 10-K/Qs, read a lot of newsletters, listen to a lot of podcasts.
8 I really do consume too much information. But how can I not? I don& #39;t actually know, ex ante, where the next great idea will come from. And it could come from anywhere. Newsletter, 10-K, wallstreetbets, Twitter, or, in this case, a podcast.
9 But there is a great quote:
“Chance favors the prepared mind.”
- Louis Pasteur
And, my mind is prepared. I have read a TON of market history. Prices and commentary. It& #39;s a sickness.
One thing in particular helped here in that I had read about Taleb& #39;s 1987 positions, and...
“Chance favors the prepared mind.”
- Louis Pasteur
And, my mind is prepared. I have read a TON of market history. Prices and commentary. It& #39;s a sickness.
One thing in particular helped here in that I had read about Taleb& #39;s 1987 positions, and...
10 I had recently watched:
https://www.youtube.com/watch?v=us3P4aTSR7g
so">https://www.youtube.com/watch... these short term rates options were in my mind as highly convex to equities, esp. with the ECB and BOJ already at zero, on the road ahead of us.
https://www.youtube.com/watch?v=us3P4aTSR7g
so">https://www.youtube.com/watch... these short term rates options were in my mind as highly convex to equities, esp. with the ECB and BOJ already at zero, on the road ahead of us.
11 Back to the trade. Its early dec 2018 the Fed is on autopilot but I start betting on Fed Funds Rate going to zero. I didn& #39;t really know if they would go below zero but I thought I could make a lot on the 100s if they got close soon due to IV gain.
12 I start the bet at 2% of trading account. If I don& #39;t really have a good handle on trade expectations I usually bet 1% or 2% of trading account.
But let us digress in to position sizing:
But let us digress in to position sizing:
13 I have read much on bet sizing, here are some links: https://www.amazon.com/Ralph-Vince/e/B001IODO5U">https://www.amazon.com/Ralph-Vin...
14 https://www.amazon.com/KELLY-CAPITAL-GROWTH-INVESTMENT-CRITERION/dp/9814383139/">https://www.amazon.com/KELLY-CAP...
15 https://www.amazon.com/gp/product/0935219099">https://www.amazon.com/gp/produc...
16 Fractional Kelly makes the most sense to me and I try to get close to 1/2 Kelly of trading account if I have a good handle on the distribution of returns, if not I start small and as I learn more will increase.
OK, back to the trade:
OK, back to the trade:
17 I started doing a lot of research on who was short these options and I found a lot of funds short Eurodollar calls. Bill Gross& #39; unconstrained fund was one. Short huge multiples of notional. This made me more confident that if Fed changed course a scramble could occur.
17b Here is a graph of how Fed Funds Rate actually evolved 2019-2020:
18 OK, back to the trade:
I started accumulating more calls during Jan - May 2019. I ended up putting out 12% of my trading account into these options at prices 0.025-0.055 for the Sep 2020 99 and 0.005-0.010 for the Sep 2020 100.
I started accumulating more calls during Jan - May 2019. I ended up putting out 12% of my trading account into these options at prices 0.025-0.055 for the Sep 2020 99 and 0.005-0.010 for the Sep 2020 100.
19 At the end of May 2019 there was a huge short squeeze in Eurodollar and the Sep 2020 rallied sharply to 98.5.
I closed 1/3 of my position for all of my basis. So, I was free rolling. I really like free rolling, takes a lot of pressure off, and lets me aim higher.
I closed 1/3 of my position for all of my basis. So, I was free rolling. I really like free rolling, takes a lot of pressure off, and lets me aim higher.
20 In June & July Eurodollar calmed down, IV came back to earth and I bough back in more calls. Bought the same options for 1/2 the cost what I had sold them for in May for the full $ amount. So my invested capital was the same but my leverage was greater.
21 Also, during this time I started shorting Eurodollar futures vs. my calls. I ended up making about 100% of my original option premium in scalping profits over the life of the trade. If I was a Eurodollar trader I think I could have done better.
22 Ok then in Aug/Sep 2019 the repo market freaks out and Eurodollar options go crazy. I closed half my position for 200% of invested capital. So, I have 100% profit at this point and a huge position in calls. The 100s never got to where I thought they would though, 0.025 max.
23 I can make a really good argument that I made a mistake by not closing the whole position as soon as the Fed took over the repo. If I was a Eurodollar trader I think I would have. But as an equities guy I just didn& #39;t understand how powerful this would be.
24 And I can tell you in all honesty that I didn& #39;t even consider closing the whole thing down. My initial plan was to sell the 100s on a cut to 25bps or re-evaluate the whole position in Jan 2020 when I had time value left and that is what I did.
25 In Jan the Iran thing happened I didn& #39;t close and then from late Jan on COVID happened. I closed as follows:
26 Feb/March sold some calls for 500% of invested capital
May did 1x3 into some dec 99.5 calls
Aug closed for 150%
Sep 500%
Closed rest for Nov 250%
Dec 2020 Eurodollar is ~99.76
Sick trade
May did 1x3 into some dec 99.5 calls
Aug closed for 150%
Sep 500%
Closed rest for Nov 250%
Dec 2020 Eurodollar is ~99.76
Sick trade
27 Props to @AlwaysLongGamma for coming along on the ride.
