No Fear!

I have but one opponent. And it is Fear. You motivate me. You drive me. You elevate me. You define me. With fear, I am fearless … I have not commented on the financial markets or the world in general for almost a year. And for good reasons as there is nothing much to opine […]

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

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.

QE expectations = When bad news is good news … and vice versa

QE Bernanke cartoon

In a normal world when economic data are poor and getting poorer, governments are running out of policy options if they are even effective with twin deficits, central banks are faced with unemployment and banks with poor balance sheets and little credit expansion, companies are faced with little growth prospects, declining profit margins and lack of innovation and ideas to deploy their shareholders’ equity ….. the stock markets should be lower, the currency should be under pressure, and rate curves should flattened between the 2-10 years but steepened between the 10-30 years … ceteris paribas.

But we are not in a normal world since 2008.  In a world where you get a series of QE either from the same country (Fed in the U.S. http://youtu.be/PTUY16CkS-k and ECB in Europe to a large degree)  or in a tit-for-tat move by BOJ in Japan since November 2012 …. everything turns on its head.  Bad news on any economic, political or financial front becomes good news in that the odds of QE as another nuclear weapon to be unleashed by a Central Bank rises!

On the back of such expectations across Europe, U.S. and Australia … we have seen rapid gains in their stock markets in the past 1-month outperforming those in Asia / Emerging markets where these countries cannot cut rates (as inflation is already rampant).

Asianmacro is light on risk at the moment and retreating to his cave as it is too high in levels to be long risks comfortably going into summer; but might be pre-matured too to be short risks as well!

Happy summer holidays in advance to everybody as I will be heading out to Europe soon to catch some nice action over there and also to suss out what is happening on the ground.  Something bad always happen over summer, for those who think that this time is different, oh well …. (*P.S. Watching those ”I Know What You Did Last Summer!” movies might provide some inspiration).

 

 

*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.