Trade Recommendation: Predicting the Taper Wasn’t The Key Component of This Trade

The goal of this article is to explain the volatility yield curve trade to a certain degree.  I know this might sound odd, but the trade was not entirely predicated on accurately predicting the taper even thought that is what occured.  I will explain why in an article on Monday, but understand that yields were likely rising regardless.

Allow me to begin by addressing predicting the taper.  I don’t want to take credit for this.  I had an on the record conversation with Jay Feuerstein, CIO and founder of 2100 Xenon, who flatly called for a December taper from the Fed.  Jay is an accomplished yield curve trader and is credited with helping develop the first bond futures contract and I highly respect him.  After he outlined the economic rational, I heard from other hedge fund traders along the yield curve, all of whom shared the view of the December taper.  Then I spoke to a DC contact who has been on the money regarding what’s really going on behind the scenes, and speculation was a Dec taper was highly likely.

I had my own reasons for thinking a Dec taper was likely, including Bernanke’s legacy and how the taper timing would be optimal during the holiday period.  But also the sense I was getting was that credibility on the yield curve was eroding – and if the Fed kept up its bond buying program the market’s reputation as a mechanism to true price discovery would be badly damaged.  These were reasons I thought the taper would come.  If you would like to hear me engage in a casual conversation about the taper and other topics, go to this Internet video interview I conducted:

In regards to the trade itself, it is playing out as anticipated.  Hold your position.  The debit spread in the puts will have a time horizon of several months (2 or 4 depending on price action) while the credit spread in the calls could have a shorter duration (less than one month to 2 months depending on price action).  Take note of the different time horizon’s selected relative to volatility expectations, I designed the trade in this regard for a specific reason.  I will explain the details of the trade strategy in an article I will post on Monday.

DISCLOSURE: These are the opinions of the author and may not have considered all risk factors. Nothing on this web site should be construed as an individual recommendation, talk to your independent advisor. The author and Opalesque may have relationships with those people they cover in the publication. Mr. Melin provides a full disclosure of his business relationships to regulators and certain eligible participants who engage him in consulting projects. Managed futures investing involves risk and there are no guarantees of safety or future performance being implied. Managed futures can be a risky investment. This web site and its content is subject to the terms of the web site. Risk Disclosure and terms of web site are available here: Performance information received on this site is provided by third parties and deemed reliable but there is no guarantee relative to same. Performance reporting sources and quality assurance techniques may include, but are not limited to: disclosure document, CTA self reporting, brokerage firm reporting, consultant reporting, spot checking other reporting databases; nonetheless no guarantee of accuracy or implication performance verification or auditing is being made by the publishers. The CTA Database is a project separately managed from

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