Tom: Z5.
Tony: Thomas, we're back my friend. Closing the Gap Futures Edition. Hello?
Tom: Got it. Got it, got it, got it. I'm learning, sort of. How are you Pete?
Tony: We all are.
Pete: Great Tom, how are you? Tony?
Tom: Doing good.
Tony: Good, good morning.
Tom: What I love about this segment is that I learn, I learn a lot in this segment and it's really fun. Thank you because closing the gap futures edition, Pete's the director of education at the CME and he knows a lot more about all these crazy futures products than … you know more about all these back [month 00:00:54] products and symbols and sizes, like I have and you're my information resource.
Pete: Wow.
Tom: You're Google.
Tony: You are a Google.
Tom: You're a Google.
Pete: You're exciting, there's so many great opportunities out there it's fun, and you guys give us a great way to discuss some and talk through.
Tom: Today, we're going to learn about something new, that we've never touched on on this show. Which is Eurodollar futures.
Pete: Right, now when we talk about Eurodollar futures everybody, a lot of people get confused, what are you talking about Euro currency futures [crosstalk 00:01:22].
Tom: You're right, because I have Euro currencies on and I don't want them. Can you take them back for me? Can I return these because-
Pete: We do not have any return window on this yet.
Tom: Because I had a 30 day trial with these Euro futures, and I am not happy with the performance.
Pete: There is no return feature there.
Tony: There's no money back guarantee?
Tom: My back's hurting, they don't fit right, I would like to talk to somebody at the CME. Who are you reporting to there? Because I want to return these back at about 1.30 and they're 1.23 right now.
Pete: We can give Mark a call, but we know what that answer's going to be so unfortunately we can't do that. We're going to be talking about Eurodollar … Euro [affect 00:01:55] is obviously the correct-
Tom: What is the currency a Eurodollar?
Pete: A Eurodollar is a 90-day time deposit.
Tom: Okay.
Pete: Of currency outside its country of origin. What do we mean by that? We mean it's for US dollars, for a Eurodollar it's the rate you would get depositing money for 90 days outside of the United States. There is a Euroyen, a Eurosterling. Now a Eurosterling would be the rate for depositing sterling outside of the U.K for 90 days. So this is basically the libor rate for US dollars deposited outside of the United States.
Tom: If I look… Now I'm sorry for sounding like such a novice here, because-
Pete: No.
Tom: I've done this my entire career and I don't know, if other than maybe a handful of times in 30 some odd years, I've ever traded Eurodollar futures and aren't they like about probably one of the most active contracts?
Pete: They are by far our largest product group traded.
Tom: Wow.
Pete: I believe yesterday alone we did over 2 and a half million contracts. What's great about these I mean, a lot of our futures products are very front month focused, the majority. If we look at S&P 500's-
Tom: Yeah.
Pete: You're doing 2 million contracts a day, but 99% of that except during the roll, is sitting right up front.
Tom: Right.
Pete: That's great, that's great liquidity. Euro's are a unique animal-
Tom: Right.
Pete: We can go out there list it 10 years out, on a quarterly cycle, March, June, 7 days. Now we can go out, and we're going to be looking at the first 5 years, every one of those contracts trade between 50 and 300,000 contracts a day. Has an open interest between 350,000 and a million contracts.
Tom: The first question that I'm going to get in the emails today is… Okay if that's the case and they've listed out 10 years and every 4 months, every 3 months out there, can I see where the curves starts to suggest if there's going to be a rise in interest rates?
Pete: Yes.
Tom: Okay, and then the other piece to this… Right now you have me looking at, and just so for everybody, I'm, we're all looking at the same thing. And you have to type this in manually on your TOS platform /GEZ5.
Pete: Right.
Tom: Now that looks like it's 374 days Dec of 2015 [00:04:00]
Pete: Dec of 2015, and what's great about this is we're going to start to look at how do we take… We explored yield curve before, we talked about the NOB spread.
Tom: Right.
Pete: Looking at the way yields may move now with our current situation, we're seeing no inflation. We're certainly [crosstalk 00:04:31] seeing the asset prices staying strong.
Tom: Okay.
Pete: If the Fed moves sooner than later, it may actually move. We're going to get a bear market on rates, but it may be a bear flatten-er, where the shorter of the curve actually breaks down more than the back-head of the curve.
Tom: That's what's happening this morning.
Pete: Right.
Tom: I mean bonds are down 7 ticks and the notes are down 30.
Pete: Right.
Tom: That's just [crosstalk 00:04:41]
Pete: And if we look at the front month Euros, the spread work we're going to be looking at, which are the Dec 15 June of 16, has already moved 2.5 points.
Tom: Before we get into that, I want to understand, I want… When I look at these one year out in December, 374 days from now. I look at this price of 99.10.
Pete: Right.
Tom: Is that telling me, and sorry again for being naive here-
Pete: No.
Tom: But I just don't use this product that much. Is that telling me that in one year those are going to be par a hundred?
Pete: No no no no no. That's telling…
Tom: The difference I'm making is between 99.10 and 100?
Pete: No what that's telling you is what the rate, what the market expects that rate to be, that 90-day rate to be in December of 2015. Right now to figure out what that rate is we always take 100 and minus-
Tom: That's what I'm saying.
Pete: Minus it by our price here 99.10.
Tom: That's what I'm saying.
Pete: It's saying right now that the rate will be…
Tom: 90 bases points.
Pete: 90 bases right.
Tom: That's exactly what what I said, so okay I said it the wrong way. I said it would mature in par, but what we're doing here is taking par or minus.
Pete: Right.
Tom: Okay. We're talking about 99 base or 90, where are we right on? 91 bases points.
Pete: Right.
Tom: Okay. Now the, just so we get, understand a step further, the tick increments are half ticks?
Pete: Half ticks. One half off a basis point which is equal to $12.5. Each contract has a notion-
Tom: 0.5 is $12.5?
Pete: 12.5 each contract has a notional already, or an underlying, it's a million dollar 90-day time deposit.
Tom: A million dollar 90-day time deposit. Wow this is cool, so then you really got a good picture. It goes from 99.10 to 99.11. It's $25.
Pete: Yes, it is.
Tony: Then if it goes from 99.095 which is right now to 99.10-
Tom: It's-
Tony: That would be $12.50.
Tom: $12.50.
Tony: Because that's each tick.
Tom: Right.
Tony: Got it.
Tom: But what we're really looking at is we're looking at a projected interest rate in December 2015. One year from now at the end of the year, basically on the three month at 9.1%. Sorry, 0091.
Tony: Right.
Tom: But where is it now? Just to put things in perspectives.
Tony: Where is it now? It's, I think if we brought up the Dec 14, we'd see it's around 21 or 22 basis point.
Tom: 21 or 22 basis points lower or just 20-
Pete: $20, $22 basis point.
Tom: The market place is suggesting that the market maybe as high as 70 basis points higher at the end of next year.
Pete: Got it.
Tom: Now that's fun context. Because that's not saying, "Hey, we're in a race that's going to go higher." That's saying you can trade as much money. You could trade a trillion dollars on that number.
Pete: Yes. These are, the liquidity for these products come from many different players, both asset managers, institutions, hedgers, any bank that is doing mortgages is using Euros to hedge their interest rate exposure, into mortgages. This tremendous pool of liquidity exists. Now for the last 5 years, we've been through the 0-rate environment. It's been very tough, these have not traded. Now if we look at the front month, the December 14th. It's almost like a flat line. Its rates are not expected to move.
Tony: Right. It doesn't move much at all.
Pete: When we start to move out on the curve, we see a very different picture, because people are placing bets.
Tom: Right.
Pete: People are placing trades with the idea of when is the Fed going to move, and if so, how quickly and how fast? We can actually go out to that point in time. Unlike what we're going to, what we do with the treasury note or bond where we're compelled to again. We stay very close towards the front in those for liquidity's sake.
Tom: Yeah we're talking about implied volatility here, it's probably 1%. Yeah we're talking about implied volatility here, probably 1% or something. I mean it's really just so-
Pete: Actually. You know what?
Tom: Yeah.
Pete: The implied volatility in the Dec 15 is 0.9%.
Tom: Okay so it's [crosstalk 00:08:35]
Pete: But the implied vol in the June of 16 that we're looking at is 2.6%.
Tom: Wow.
Pete: Yes they're tiny numbers, but in terms of the differences of them, it's a dramatic difference between the two.
Tom: What's really cool about this, and you guys are getting to see this really upfront is what's happening now is the individual investors, the self-directed investors Tony, is becoming so, is moving along so quickly that we're now able to have… We're able to have these discussions. One of the next stops for you is to go over to, back over to TOS and sit down with the futures team and say, "Hey, listen. We have to show because we're used to showing the active months."
Pete: Right.
Tom: As the front month. When you click on this you are not getting the right active months.
Pete: No you're not.
Tom: This is all part of that domain expertise, which I'm not afraid to say that all these firms need to be-
Tony: To evolve. Sure.
Tom: To evolve and have this, but what's so cool is we couldn't even have this conversation a couple of years ago.
Pete: Right.
Tom: Now we're having this conversation we're going to say, "Hey, listen. You got to use the right front months, the right options and everything like that." Which is, I think is just a huge step forward. What are we going to look at today, Pete? What's the-
Pete: Okay we're going to [crosstalk 00:09:45], we've actually gone through a bit of this already. We've talked, we've done the NOB spread before. Notes over bonds.
Tom: Right.
Pete: We're using 10 years and 30 years to express an opinion on interest rates. Remember guys, for pricing, when rates go higher our instruments go lower. There's that converse relationship between rates and prices.
Tom: Yes.
Pete: Trying to play the inevitable rise in interest rates, it's been frustrating, and I mean we've all-
Tom: You're preaching to the choir.
Pete: Yes.
Tom: You're preaching to the choir of every trader of the free world.
Pete: Right.
Tom: There's nobody betting at 0 that they're going below 0.
Pete: Well that's so…
Tom: You have the privilege of it pays not to grow a mentality but we haven't been paid.
Pete: Right. Try to short the long end, in whatever way we do it, whether it be an outright short, or trying to construct a some sort of a long-end yield, curve trade, it's been very frustrating. A lower price higher rate expectations are already factored in the treasury futures prices.
Tom: It's not like-
Pete: And the delivery rate error, so that's-
Tom: Just so we all understand. It's not like everybody. It's not like all the traders in the world are too dumb to realize that at some point in the future.
Tony: Everybody can see a curve, sure.
Tom: Everybody understand that rates are at 0, at some points they're going to be higher. The whole bet is…
Tony: When
Tom: When and how much does it cost to carry that risk premium.
Pete: Right.
Tom: Because that's all it is. It's the same bet you play with. Everybody knows volatility at some point is going to go higher.
Tony: Everybody knows this, the question is-
Tom: When.
Tony: Right.
Pete: Right.
Tony: If there's no risk to hold it, then you'd-
Tom: If there's no risk to hold it, if there's no risk to hold short treasures right now, you'd mortgage your house.
Tony: Of course.
Tom: But there's obviously a lot of risk there, hence the game we all play.
Pete: Right. The next slide actually highlights the idea of if we wanted to use treasuries and we've all gone through this, we're cold and under the shorts.
Tom: Sure.
Pete: We're rolling Ford. And we're always rolling a Ford. As you said, as we look at the Ford structure of the 30 year or the 10 year. They're all priced at a discount. The market is basically forcing you to roll at an ever increasingly lower price.
Tom: Yeah.
Pete: You're paying another tax to estab-, in a way a tax. You're paying a way just to keep that position on.
Tom: We throw it on at the same bucket Pete, and we say it's the cost to carry. Because even though everybody uses different terms and whatever else is, ultimately it's the cost of holding the position.
Pete: Right.
Tom: And we've all started, we're getting very comfortable here. Unfortunately we're getting very comfortable with that.
Pete: And it depends again on terms, structure and expectation, so this is another challenge in maintaining the duration play, maintaining a position in these markets. If we have an unappealing term structure like we have from what we have and what we saw.
Tom: Okay.
Pete: Treasury futures it can make the positioning for higher rates difficult. We have experienced it. How can we take a long-term position, if we believe that interest rates will rise. The answer is and what we're going to be talking about, it is in using the yield curves but in Eurodollar futures.
Tom: Okay.
Pete: We're going to look at this great market that, and if we could-
Tom: And this is not a traditional retail strategy, which we're seeing here today, which is what makes this segment so cool is this is much more of a "professional approach" which is why it's called closing the gap. It's much more of a professional approach, which it's long been used by prop firms and hedge funds and whatever else.
Pete: Right.
Tom: And hedgers, which can include everything from banks all the way on down. We're taking it to a retail level. Does it mean you're going to run out tomorrow and start hedging everything you have, probably not? What it does mean is that there's going to be opportunity over time, like maybe that difference in implied volatility for 2016. It's hard for us as retail investors to think about June 2016 futures right now.
Pete: Right.
Tom: Very hard for us. But the flip side of it is we're starting to become much more sophisticated as investors, and this is the kind of stuff we have to know.
Tony: Sure.
Tom: It makes us more articulate, which ultimately makes us the better investors.
Pete: One of the things that is, futures have so many benefits. We know the leverage, liquidity, the access are all positive. Depending on the product though, we are compelled to participate in that front month. This is truly a unique animal. This is the one of the most actively traded of all futures products and it goes out a 10 year span. There are 40 active futures quarters, again as Tony highlighted, the minimum tick is 1.5 of a basis point or 0.005 and that's worth $12.50. Again, because you're over the price-
Tom: You can trade over 100?
Pete: Right.
Tom: What if everything was under, under, what if you're paying to-
Pete: If we went to negative rates? [crosstalk 00:14:29]
Tom: If we went to negative rates. I don't know. I don't know if that's ever happened.
Pete: I don't think that's ever happened, and I don't think-
Tom: Wouldn't that push it over a hundred?
Pete: I think it could.
Tom: Okay.
Pete: I don't know structurally if it could price that way, it's a good question and-
Tom: You're going to break all the system. Trust me, I do not want to see that happen. My biggest position right now is short 10 year and short the NASDAQ.
Pete: Okay
Tom: That, I have that pair on.
Pete: Right.
Tom: Short short. I definitely do not want to see that happen. The Eurodollar is often confused with the Euro Currency futures which is something that we're long right now, Euro currency futures. These are a completely different animal.
Pete: Right.
Tom: I mean-
Pete: Yeah, they're interest rates products they have nothing to do with the foreign exchange side of it.
Tom: I grew up on the East Coast, we confuse choosing the times all the time. We couldn't tell the difference.
Tony: The Eurodollar doesn't confuse them, but you're the side man.
Tom: If you grow up in Chicago, so we don't have. It's a much, much harder south side Irish versus whatever north side Irish. I couldn't tell the difference. Euro Dollars are interest trade products, they represent the forecast for 3-month interest rates, given on 1 million. Is this the largest kind of underlying? I mean a million? That's a liquid you know. I can't think of a notion that's a million dollars. I guess 3 months, the million dollars doesn't seem, given this probability it's probably risk [00:16:00] priced accurately, but it seems to be the biggest underlying notional.
Pete: I think it is. Our 2 and 3 year treasuries are $200,000 but again, I think this is the largest notional product.
Tom: To determine the rate, implied by the future, you simply subtract the futures price from 100. That's what we just talked about, so at least you can have a really clear picture of where everything's priced for right now March 2015, Eurodollar futures are trading 99.735. Subtract from 100 and Euro 0.265 is your rate for a 3-month paper right now.
Pete: That's basically March 15 is our front month. That is US, where is the market right now, and that is where we're at right now. And this is the curve, this is the shape of the curve, and this is just looking and this is 5 years going out. We can see that this is the play here, is the shape of this and expectations for how quickly. When they'll move first, when the Fed made move and how dramatic that move will be. This is the first, as we see those first 3 or 4 months. Again, we've first 3 or 4 quarters, which we see up there. We're not expecting a change. It's as that there's just changes in expectations take place, this is where we start to see movement, and we'll start to see.
Tom: This is 2 years old.
Pete: This is actually 5. This curve is 5 years out.
Tom: No, the curve is 5 years out, but you start to see movement 2 years out.
Pete: 2 years out. Yeah. About a year and a half to 2 years.
Tom: Yeah.
Pete: The velocity increases as we go front 2 or 3. That's the sweet spot the market is expecting right now. That can change.
Tom: We get the question all the time via email. How do you have a clear picture of when rates are going to go higher? Well you don't actually know and there will be surprises along the way. If you wanted the market, this will be the market place. There's a lot of body here, we're talking trillions of dollars.
Tony: Sure. Sure.
Tom: Essentially if you want to know what the market place is saying, it is an effective market place here, efficient market place. Here you go.
Pete: It is, and you will see this curve. This is driven by asset managers, hedge funds, really big players who have a very strong opinion about the market. It often times, I hate to say leading indicator, but it's a good sense of-
Tom: Sure.
Pete: Where the money is considering where they need protection.
Tom: I'm actually upset that I haven't played in this space very much, and I think I missed some. I'm not sure I might.
Tony: There's enough volume there. You going to see if you missed out on something. The volume is there.
Tom: I had to figure out what to do, but all right let's keep moving. We should, we can also visualize the relationship between different Eurodollars expiration and their change over time. What you've done here is you've essentially just-
Pete: The guys put together, the team put together a great job. It really highlights Dec 14, which just expired. We see how flat line that was, we knew rates were not going to change this month. We see that as we go out-
Tony: The market was saying rates weren't going to change this month for sure.
Tom: The market wasn't saying-
Pete: As we look at we can see that as we go through Dec 15, Dec 17, and each line is in color there. We start to see more volatility in that curve, and more changes in its shape. Again, it starts to let us see what are you looking for? You want movement, and you want momentum to look heavy, to look a little bit further out. That's where the [inaudible 00:19:26]
Tom: It also shows where the opportunity is because the problem with front month Euro is that it's such as, if you were just trading it at 26 basis points. You'd be lucky to make a penny-
Tony: Right. Yeah sure.
Tom: Or so in 6 months.
Pete: Right.
Tom: There's too much certainty in your term.
Pete: Right.
Tom: As you can see, similar to stocks longer term there's a lot less certainty and there's a lot more volatility the further you go out and all we did was make a visual representation to that.
Pete: Right.
Tom: Okay cool and with anticipation of significantly higher rates already priced in the Eurodollar term structure, it may be more productive taking the spread position rather than an outright position to establish a bullish position on interest rates. If you were to do this, bearish on prices, bullish on rates. If you were to do this, how much of a saving is it to the individual that we spread off in the Eurodollar futures.
Pete: This is the great story too. This is the ability to do these in March of 15, and again, guys going out all 5 years. There's at least 100,000 going through everyday. Half a tick wide, you do have that liquidity. You can look at this and play this any different way, but to put this trade on, it's a $220 margin. [crosstalk 00:20:47] Great. Yes. That's the buying power reduction $220.
Tom: That's the Dec to March-
Pete: We're selling. If we wanted to be, if we thought the market may be a little bit more aggressive than what is being price at right now. We'd sell the March of 16, we'd buy the Dec 15, and we basically look to-
Tom: We would not do that side. We would do the other side. Hold on. You're saying-
Pete: Yeah.
Tom: You think this is aggressive?
Pete: This is aggressive-
Tom: You don't think this is priced to perfection?
Pete: Well I think right now, honestly I think the market has we've seen. What we do is guessing, has the market. The market is looking for this between these 6 months, the rates are going to roughly go up, half a point.
Tom: Yeah right.
Pete: At the libor point.
Tom: Yeah right 48 basis points.
Pete: Right. If we are thinking that they're, that's that aggressive enough, we would sell the March by the days. If you think that's an overly aggressive sense.
Tom: Sell the March and buy the Dec?
Pete: You would sell the March buy the Dec, because you would think that they're, the March prices would go down more than Dec prices-
Tom: Right right right.
Pete: The spread would go out.
Tom: The inverse, right right. Okay got it, got it, got it.
Pete: Right.
Tom: Yeah yeah. Okay okay I understand. Yeah that's how I'd want to play it.
Pete: Right. If you think that the Fed's going to move faster-
Tom: How much rate does this particular trade have?
Pete: We have that in the next chart.
Tom: Okay awesome. To take a position on this spread, you'd buy the December and sell the June. Sure, because if you that then you're going to, because it's inverse the whole thing.
Pete: It's inverse. Right.
Tom: This is betting on higher interest rates?
Pete: Yes that's it. This is betting on that curve we looked at is going to get steeper and more aggressive.
Tom: Okay let me see if I can figure this out. Where has it been, around 48, 49 the whole time?
Pete: Actually it's been appreciatively higher. It's been closer to this. As we go back and looking it's been 65, spend some time around 55.
Tom: Oh I see.
Pete: 55, 54 there. And then in early October when we really had that idea that they were going to take longer it's-
Tom: It got down to 34.
Pete: It spiked on at a 34 yesterday, it was trading. When I put this together it was 48.5. I think today right now it was probably 51.
Tom: Okay if it moves. For every penny it moves, it's 25 dollars.
Pete: Right.
Tom: Okay.
Pete: It's still a relatively small range. It is, so it's a relatively small range, that is why in terms of March.
Tom: This must trade like water.
Pete: It's, it's what?
Tom: This must trade like water.
Pete: No, actually if you.
Tony: No, he means it trades a lot. This must trade a lot.
Pete: Oh sorry.
Tony: To be very liquid.
Pete: It's incredibly liquid, which is great. Obviously if you wanted to stay small, with a $220 impact on your buying power. It's easy to do that. Depending on what you wanted to do.
Tom: Cool.
Pete: It's certainly a market that will let you choose the size you want to put on.
Tom: Okay let's do this, what am I, what am I, which one am I selling?
Pete: You're selling the June of 16.
Tom: Let me quote it then.
Pete: Remember, Tom.
Tom: June of 16.
Pete: We could do this though as a spread.
Tom: I know, so how do I write down for this spread.
Pete: If you bring up the Dec 15 on this spread.
Tom: Which is which one? Which is?
Pete: That would be /GEZ5
Tom: Okay.
Pete: Choose the calendar font, that you see the calendar functionality?
Tom: /GEZ5.
Tony: Forward slash GEZ5. Here Thomas /GE5?
Tom: Right.
Pete: Open that up. And then we're going to-
Tony: How did you find that in there? How did you get that?
Pete: Right here.
Tony: Thomas, look.
Pete: If you can drag it. If you can go over a little bit.
Tom: Oh oh oh oh okay.
Pete: Go over to the last edition. Open those GEZs so we could see which one. Yeah down we see GEZ5/-/GEM6. That's the market we want right now.
Tom: GEM-
Tony: A bid of 51, 51.5.
Pete: Right it was 49 yesterday but we were with the movement and Dec 5 and June 6. Open Dec 49.5. Oh so that moves around a little bit.
Tony: Up 49.5 it's been as high as 63. It's mid-price. I mean it's mid-range.
Pete: Right.
Tom: I'm buying this?
Pete: Yes you are.
Tom: I'm buying this. Okay I'm going to click on the ask, but I'm not going to pay 51.
Pete: No.
Tom: What do you think? 50?
Pete: Sorry. Sorry.
Tom: 50? Give me a number what are your? I'm just kidding. Let's pay 50 all right, Tony?
Tony: Sure.
Tom: We'll start off with, hang on I got a bid in. I love this Pete. Thank you. Okay I just put a bid in below the market, I put a bid in at 8.50. We'll see what happens.
Pete: Good because we spend a lot of-
Tom: I've had to widen my horizon today.
Pete: We spend a lot of time 48.50 and 49 that would be a great spot to start to see if we're getting-
Tony: Yeah, I'm just going to nibble at 50.
Tom: Good. Then I'll build up my position higher than that.
Tony: Okay.
Tom: I love this. I'm so excited.
Tony: Not a great graph, I should've had it up on a line graph which you can see.
Tom: Yeah I think this is, no they're a great segment, I'm doing this stuff that I've never done before. I definitely never would've made this trade if you're not in here. I fully expect to get filled based on the range these things trade. When this thing gets to 35, I'll be coming to get you.
Tony: We'll take a quick break, appreciate you're coming in Pete. Back in 90 seconds. We got the opening bell.
Tom: That’s great.
Pete: Again margins are exactly the same. Just small, so margin on a micro euro would be one-tenth the size of the margin on a euro FX.
Tom: We’ve got to move here, Pete. Tell me what I’m looking at here.
Pete: What we are looking is three things here. We are looking at these numbers we talked about. We are looking at the 6E chart, which we could see why it is trading dramatically down. Even 115.70 …
Tom: That’s the euro versus dollar.
Pete: No, that’s the euro versus dollar, right, that’s 6E that’s euro FX currency. The red line which is not coming through to, this is my fault, I should have changed background.
Tom: No, no [crosstalk 00:34:26].
Pete: The one at-the-money wall in red, which is printing at, here it’s I think it’s saying about 12.7. It’s closer to 14.5.
Tom: This is the euro volatility.
Pete: This is euro volatility. Now that risk reversal we talked about, the value of the one month 25 Delta risk reversal, this in green. We see that putting in substantial new loans. That on a movement basis, we see this big spike of volatility and that spike coming at people demanding more.
Tom: Let me ask a quick question, what does this mean to you? You’ve been trading this product for 20 to 25 years, what does this mean to you? Like I look at this thing right here and I go, wow, this is between volatility in capitulation mode, price at extreme. Obviously downside extreme, but price in extreme, volatility almost capitulation mode, that’s the biggest diversions we’ve seen for a long, long time between price and volatility. I look at this as an opportunity, maybe to get long euro, but it hasn’t worked because you can’t say we would have just done it here. How do you look at this?
Pete: No, I look at it the same way and I look for years, it was just strictly futures, and I would look at this to help me determine, are we seeing bottoming action? Is this a place I want if I was a reversion trader where I would want to establish a long? The one thing is we are still in catching a falling knife mode here. How can we construct? And this is the power of options and futures are giving us. We can start to structure a number of different things, even if we do something like a ladder put strategy where we sell some puts on the way down.
In other words the market is soft. This is indicating that both volatility now at 14.5% and the skew are getting to two extremes. I don’t necessarily want to catch the falling knife by the outright, how can I start to get some long exposure and have you pay me a little bit? That’s where we can start to look at option strategy, it play a really important role in helping us establish a position, and establish a position at a good cost basis.
Tom: One of the things that I just did because I like to practice what we preach on the show is so important. With the euro down here down 56 index right now is down a little bit, I just sold some the 114 puts. Just as a way because, you know what, you made a great point. Look, where volatility is here. I actually like selling these puts better than I like.
Tony: You did that in March.
Tom: I did that in March. I like selling these puts better than I like buying the euro here with the volatility of [inaudible 00:36:54]. [Crosstalk 00:36:57].
Pete: What I like.
Tony: Seems like a logical play [crosstalk 00:37:02].
Pete: It definitely does, and you know what I like is by doing it [crosstalk 00:37:05] if the market goes here and you get them, you get them at what you feel. You feel values right now. If you get them there, it’s really getting them at value. Unless you participate without having to sweat buying basically something that hasn’t structurally changed.
Tom: These are some potential strategies I’m sorry, I’ve got to move this because these are way over.
Pete: Right.
Tom: But like one of the choices which you put up here is buying call spread and financing with the short put.
Pete: Right. That’s another way to be get more delta exposure and get a little time to get it working in your favor.
Tom: The important takeaway here by the way, and again because I want to show you how all traders think. I didn’t talk to Pete before he did this but, what would Tony and I have done if we were writing this ourselves? We would’ve bought the at-the-money strike, we would have sold the out-of-the-money strike, we would have sold the out-of-the-money put. We all think the same way.
I’m not saying we are all always right because we are not. Trust me we are not. But we all think the same way because there is a set of mechanics. I don't care who you are, but you are it’s like, just like you’d take a three poker players that have [inaudible 00:38:08] talk to, seen each other play poker. They are all going to play the same way.
Tony: Sure, sure [inaudible 00:38:10].
Tom: Because that’s how the mechanics workout. I got to go to this last slide, and again here is just a short iron fly. I think what’s Pete trying to show here is that regardless of strategy selected, whether you are trading 6E which is the euro or you are trading Tesla in a listed market, we are doing the exact same thing. The toolbox translates beautifully.
Pete: That's right.
Tom: Into the futures space. Absolutely. You guys have worked so hard in getting tastylivers to build and expand, use their toolbox, and all those tools come right over to the future space and work wonderfully.
Tony: Again, I just sold those puts because we practice, we preach here, sure. To me that’s so important.
Tom: We have a discussion about something and now do it if you think you like it.
Pete: It’s a bullish strategy.
Tom: Thank you so much, we kept you on for way too long today, but I just, there was so, I can talk about the Swiss franc all day right now and I have you [crosstalk 00:39:00] I guess.
Tony: He just did the first time, right.
Tom: No, no, that was euro.
Tony: Euro, but you are making a play.
Tom: I can’t even look at the screen right now. Thanks so much and see you in two weeks.
Pete: Thank you. I’ll look forward to it.
Tony: Thank you, Pete. We’ll take a quick break, when we come back we have a market measure, we were talking about sector ETF. You are listening to tastylive Live and we’ll be back in 90 seconds.