This page has been archived and commenting is disabled.

ES-AUDJPY "Swiss Watch" Recoupling Means Money In The Bank For Divergence Chasers

Tyler Durden's picture




 

Last night we said: "So for any insomniac traders with a taste for virtually risk free
arbitrage, here is your opportunity to take advantage of one of those
ultra rare occasions where the ES is actually cheap to the AUDJPY - buy
spoos, and sell carry, for a roughly 6 point indexed spread convergence." The spread is now closed, and recoupling 20 out of 20 is in the books. For those who took on the minimal risk (and hopefully leveraged 1,000,000 times, just like Merrill's prop desk in the days of yore), congratulations on this "guaranteed" profit.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 07/20/2010 - 16:15 | 479544 Bankster T Cubed
Bankster T Cubed's picture

ain't our not-controlled by banksters free market great?

of course correlation should be perfect!   There exists not one reason why, other than a central bank funded control program, but of course that would involve some sort of conspiracy and we know those only exist in books.

Tue, 07/20/2010 - 16:18 | 479554 scratch_and_sniff
scratch_and_sniff's picture

Took it down! Roll on #21

Tue, 07/20/2010 - 16:18 | 479555 johngaltfla
johngaltfla's picture

SHHHHHHHHHHH. I only try to sleep 3 nights a week. Quit encouraging people to diverge from watching Bubblevision and buying Cramer's recommendations.

 

 

Tue, 07/20/2010 - 16:18 | 479557 prestera
prestera's picture

OK, dumb question....in what ratio do you make this trade in the future.......or easiest way to calculate?

For those of us that have never worked at a trading desk....

How many /ES to how many AUD/JPY....?  Or how do you calculate it....?

Tue, 07/20/2010 - 16:31 | 479597 lettuce
lettuce's picture

Let's say you have $2000.

 

Buy $1000 of S&P500 futures (or SPY).

Sell short $500 of FXA; buy $500 of FXY.

 

Someone correct me if I'm wrong here, but this is probably the easiest way to play it with ETFs instead of trading raw futures and forex...

 

I should also say that I am really enjoying watching these ramps/unwinds on my own screen now but I ain't trading it (stupid 30 day holding period).

 

Tue, 07/20/2010 - 16:53 | 479666 lettuce
lettuce's picture

and indeed yes, if you compare, over today's daytime session, the proxies of SPY and FXA/FXY for ESU0 and AUD/JPY are reasonable. I don't know how well this holds outside of just my looking at one daytime session, and it is clearly unwise to try and trade these ETFs during pre/post-market hours to try to capture the same spread result here...

 

But one can quite easily see that the divergence window begins to open at around 11am this morning whether you're looking at the futures/FX or using the ETFs as proxies.

 

Damn 30 day holding period.

Wed, 07/21/2010 - 20:31 | 482287 rd
rd's picture

Apparently you only need $1,000:

Buy Spx=-$1000

Sell FXA=+$500

Buy FXY=-$500

Tue, 07/20/2010 - 16:20 | 479561 homersimpson
homersimpson's picture

I guess we all know the answer to this article:

http://www.investopedia.com/articles/stocks/10/stock-market-rigged.asp

Tue, 07/20/2010 - 16:23 | 479569 BeerGoggles
BeerGoggles's picture

It's not quite 20/20 TD. There are at least a couple of times where the recoupling did not result in a profit or did not recouple when you mentioned it had.

I highly suggest people don't overleverage on this - they CAN diverge further than when you enter the trade.

Tue, 07/20/2010 - 16:34 | 479605 Comrade de Chaos
Comrade de Chaos's picture

One of those days, and I bet it will be pretty soon the trade will become way overcrowded. And when shit hits the fan and all will rush to the exit, the doors WILL be shut. That day might become one of those historic moments, people will write books about. Not that most will learn anything from those books, because let's face it, it's never the same until it is : ))))

Tue, 07/20/2010 - 16:34 | 479609 Rick64
Rick64's picture

They are on the same algorithm.

Tue, 07/20/2010 - 16:56 | 479679 Joeman34
Joeman34's picture

Apologies in advance for my ignorance, but can someone please explain why this is an arb opportunity?  What's the relationship that should hold 1:1?  Thanks

Tue, 07/20/2010 - 17:38 | 479787 lettuce
lettuce's picture

This is purely a technical trade that has witnessed de-couplings of stocks with carry-trade FX crosses (AUDJPY being one such cross) over the past few weeks, due largely in part to the "strange behavior" of the US equity market for some time now.

 

This is not ARB in the sense that you found a mispriced cycle of FXs (e.g. convert USD to JPY into CAD into GBP and back into USD and have more than you started)... but arb in the sense that each time there's been a decoupling of these two, they've come back together (and now we've seen it in both directions - with stocks being rich or cheap relative to the cross).

Tue, 07/20/2010 - 18:08 | 479847 BeerGoggles
BeerGoggles's picture

Except it doesn't always work due to how much the 2 can move intraday.

It may start off as a 6pt spread between AJ and ES (6pts in ES = 60pips in AJ) but when they move so wildly they can sometimes recouple (on the chart) out of sync and still be at a loss.

When we were arbing EJ and ES, this did not happen.

Wed, 07/21/2010 - 08:35 | 480566 danimal
danimal's picture

If they recouple on the chart and you have a loss, you are using the wrong ratio. Also, when calculating a ratio for a spread (assuming you want to start at 0) it depends on what reference point (what day) you start at. Also, I think 1 contract of auj/jpy traded yesterday at the cme, but already 5 today. That would not pass my min. volume test for a tradable spread, (try cash fx maybe, but entails new risks). Also, someone made a good point on above on when it goes the wrong way, you could get killed. 

Tue, 07/20/2010 - 18:21 | 479877 prestera
prestera's picture

Anyone have a recommendation to the best charting software to overlay the two.

I appreciate the thought of using the ETF...but I have no problem trading /es and aud/jpy in my IB account...and I think I understand the concept of using = quantities of money....I was thinking about 1 /es contract = $54,000 which = AUD value of = A$ 47,693....so in theory it would be 1 emini to that dollar amount of the cross pair.

Is that correct?

Of course 20 in a row is pushing it and now that the newbie.....ME...gets involved Im sure that the trade will clean my clock (swiss watch...).

Tue, 07/20/2010 - 18:28 | 479894 lettuce
lettuce's picture

That should be the right train of thought but remember that you want to involve selling the yen when buying the auzzie dollar because the trade is constructed along the lines of them both being involved (e.g. their cross-rate) rather than just one.

 

It's kind of a bitch unless you have a brokerage that'll construct the thing for you automatically (which would be awfully nice...anyone want to start a brokerage...)

Wed, 07/21/2010 - 02:50 | 480424 scratch_and_sniff
scratch_and_sniff's picture

Quite right, i wont be trying it again...after a run like that we are at the wrong end of this little tale. If it goes tits-up you will pay through the nose.

Wed, 07/21/2010 - 08:37 | 480567 danimal
danimal's picture

Try Aspen Graphics www.aspenres.com 

Tue, 07/20/2010 - 21:02 | 480095 Gary Busey
Gary Busey's picture

Where's a Robo post when you need one?

Do NOT follow this link or you will be banned from the site!