Month: July 2013

It’s a few hours before U.S. employment report … Of Trees payoff & cheap optionality

Asianmacro1 Comment

There’s a sense of palpitation in the air ahead of every U.S. employment report on the 1st Friday of the calendar month that will then set the tone of all markets across all asset classes.  The question is do you try to do something ahead of the economic figure release in an attempt to ”guess” what it will be vis-a-vis the market consensus whereby all current markets before the figure release should be trading at what will be the appropriate ”fair value” ex-ante to the consensus expectations?

Illustration 1: Ex-Ante Path Tree Portfolio Impact Assessment Model

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Asianmacro over the years have designed some path dependency tree diagram model with some amount of assumptions in assigning my ex-ante probabilities of each outcome going out to at least 4 to 8 nodes ex-post figures.  This does not tell me what to do but rather the consequences if I leave my portfolio as it is and the resultant impact after the figures ex-post … so that I can decide what I need or should do if I am worried about the expected portfolio value ex-ante or a particular node outcome especially if it involved a substantial drawdown even though the probability might be low ex-ante, before the figure release. An example of a screenshot output of my model is found above in Illustration 1.  It is actually quite interesting to note that this exercise is seldom done even in most financial institutions or funds where a over reliance on VaR models is really less than ideal since it is backwards looking using historical volatility & correlation data like looking at the rear view mirror of a car when driving!

Illustration 2: Payoff Diagram for TYQ3 Puts 125 / 124.5 / 124 / 123.5 Condor

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Anyway, it is definitely a toss-up of the coin on such events like U.S. employment data although I must say that Q.E. tapering or exit is definitely on the cards and it is only a question of when. But it will be low risk-reward ratio to attempt to be long or short any instrument ahead in size and that is when Asianmacro likes to exploit some cheap option strategies if they exist due to heightened volatilities or skews.

My favorite at the moment is buying some cheap put condors on UST 10-year note futures with expiry in two Friday on 26 July 2013.  Recent history has shown that 10-year yields move between 20-30bp in the next 2 weeks post U.S. employment reports with 50% of the move occurring in the 2 trading days following the release.  Current UST 10-year yields is at 2.50% and I am looking at it to head to 2.2/2.3% or 2.7/2.8% by 26 July 2013 and not be here by that point in time.

Asianmacro managed to buy the downside put condor with payoff shown in Illustration 2 for less than 1bp with 10x payoff.  This is the kind of odds I normally like with definable downside risk of 1bp and making 10x max-payoff should UST 10-year yields rise to 2.7/2.8% for 26 July 2013 expiry.

 

 

 

*Asianmacro is a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.

Making a home run

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Asianmacro has not posted since the 1st week of May to smell the roses into early summer and also in travels across Europe.  Looking back in the past where I have been in the futures open outcry pit, a bank market maker and then proprietary trader, followed by stints as a hedge fund portfolio manager … I came to realise that the most amount of money is only made slowly over time when you can sit comfortably on a position and for your investment thesis to bear out (*assuming that you have correctly done your homework and not stopped out way beforehand).

This meant that position sizing must be such that for longer term trades to bear out and perform well to make that home run, it must not be over-leveraged such that you cannot sleep at night with all the gyrations and noise that the market will invariably move like a butterfly flapping its wings at the slightest breeze!

Notice how Warren Buffet always appear to be such an investment stud with most of his positions reaping home runs more often then not and covering his losses or ”mistakes” elsewhere.  Mr. Buffet has the ultimate advantage in having a ”cheap & almost free float” of investment capital via the perennial annuity premiums collected from his insurance business (where the cost is even lower than deposits obtained by banks who similarly will lever up to make loans & other investments).  This allowed him to almost ”never cut loss or stop out of his positions” and we all know that even a broken clock will tell the correct time twice in a day … Mr. Buffet can in fact be proven right most often than not as ”in the long run, we are all dead” does not apply to his investment style.

Asianmacro certainly do not have the good fortune of owning an insurance company and also with the capital size of Mr. Buffet.  Nevertheless, as highlighted above, from the 20 years of cutting my teeth and learning from the losses made while accepting with humility that I was probably more lucky than smart with my winners … In any given year, there are probably about 1-3 real serious tradable themes that you can express via a trade that is ”medium” term of 3-12 months of more in investment horizon that will be the 10-baggers.   Most of the other time when you are fiddling & twiddling your fingers, you should not be doing anything much unless you have the systems, tools, inclination and skills to do some short term noise & gyration trading … you could be expending more energy than ever for very small incremental returns.

If you look at my postings this year, my 3 medium term thematic trades consistently were:

  1. Long USD preferably via DXY futures on medium term U.S. economic recovery.
  2. Short AUD/USD where the lucky chaps down under end their spell of good fortune.
  3. Short China and/or underperformance of Asian equities.

They have all performed well YTD 2013 and there is no reason to close out the trades or a change in the theme.

Asianmacro will probably be eating, drinking, lazing and snoozing a lot more over summer.  But will try to wake up from my stupor now & then and post again (*on shorter term gyration noise opportunity) and potential medium term thematic trades as I start my re-assessment for H2 2013 into 2014 outlook in deploying my capital again.

Good luck!

 

 

 

*Asianmacro is a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.