This article addresses the yield curve trade that recommended a short position in the Ten Year Note going into the Federal Reserve taper announcement and also tees up a new relative value trade in gold / silver vs a small basket of currencies selected based on their levels of debt.
Yield Curve Trade
In our yield curve trade recommendation, the long debit spread (buy June 2014 120 put, sell 118 Put) has essentially been treading water while the real performer is the short in the money credit spread (sell March 2014 125 call buy 128 call. Note that the initial quoted prices were inaccurate).
Ultimately my expectation is that the short credit spread, currently in the money, will move out of the money at some point before expiration in March. When this happens I may recommend a trade to move from an in the money spread to a more out of the money spread, as the first breach of the 120 level could be the point at which buyers find short term support. The goal with this trade is the value of the options sold goes down in price. My planning on this trade is that the time premium baked into the options will be rapidly declining in February and March, which is when I anticipate the trade to be most profitable.
With the long debit spread the goal is to see the price of the spread increase in value. In the out of the money debit spread I anticipate the Ten Year Note market will move in the money (past 120) at some point between now and the option expiration in September. As I said this is a long term trade and my expectation is that this will happen before the 2nd quarter of 2014 ends. If this doesn’t happen – and my assumptions are incorrect – we may look to exit this trade near the second quarter of 2014.
Long Gold & Silver Recommendation / Short Select Currencies
Another recommendation I’m looking at, and may put within a week, is long gold / long silver and short a basket of currencies where government debt is an issue. This is a relative value (spread / arbitrage) trade and I might actually overweight the long gold aspect of the trade.
The gold market appears manipulated to me, which is speculation on my part. More concrete, on a relative value basis the spread between gold and certain currencies has moved past a divergent point and I’m going to look for convergence back to the mean. Selection of the exact point a relative value trade is overvalued and undervalued is impossible, and thus this trade could experience some downside loss depending on the trade entry point.
Much like the yield curve trade, I’m going to recommend the trade be executed using option spreads. I find this to be the best risk / reward execution method in my opinion.
Managed Futures Recommendations
In addition to trade recommendations based on my previous hedge fund trading method, this site is going to be making managed futures recommendations.
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