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Intraday Compression Arb Closes: Both Legs Profitable

Tyler Durden's picture




 

Yesterday, in collaboration with Capital Context, upon observing the dramatic divergence between most assets and the 10 Year in the S&P warning aftermath, we noted the following "For those so inclined, an appropriate convergence trade would be a
2s10s30s neutral: essentially locking out for parallel curve shifts to
moves in the ES, while trading the 10 Year spot for a compression trade
with the ES, but keeping the wings of the butterfly constant as both the
ES and the 10 Year is bought
." Less than 24 hours later, the divergence has now collapsed for a 6.5 pts pick up ES, while the 10 Year leg also went in the expected direction by 3 bps. Trade now unwound.

Before (link):

After:

 

 

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Tue, 04/19/2011 - 15:59 | 1185422 Mercury
Mercury's picture

Nice call.  Looked like it was only going to get wider last night.

Tue, 04/19/2011 - 15:57 | 1185439 Tyler Durden
Tyler Durden's picture

And any minute chart momentum traders probably closed it prematurely. At least their broker will buy them dinner/consolation entertainment.

Tue, 04/19/2011 - 16:04 | 1185472 topcallingtroll
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The less i obsess the better i trade. It has been hard not to obsess thru this insanity.

Tue, 04/19/2011 - 16:09 | 1185482 HUGE_Gamma
HUGE_Gamma's picture

what about the 3 tick momo floaters?

Tue, 04/19/2011 - 17:05 | 1185710 disabledvet
disabledvet's picture

oh, "an expert bond trader now" are we?  while i would VERY much like to see Fed Chairman "Tyler Durden" not even I venture into this dark place.

Tue, 04/19/2011 - 15:59 | 1185452 The Axe
The Axe's picture

over my pay grade....Jesus

Tue, 04/19/2011 - 16:06 | 1185480 zaphod
zaphod's picture

I still have no idea what this trade was. It was complete gibberish to me.

 

Can anyone explain at least what the mechanics were for those of us that want to learn?

Tue, 04/19/2011 - 18:08 | 1185576 Mercury
Mercury's picture

The 10 year Treasury, The S&P 500 futures, oil and the Euro (vs.$US) had been highly correlated as evidenced by the left side of the chart - they go up/down very much together.

Suddenly, The 10yr. (yellow line) breaks away from the pack - off yesterday's S&P news probably.  The trade here was a bet that they (or the 10yr and the S&P futures at least) would return to their previous correlation and intersect (or come very close) again. 

This bet was placed via a "butterfly" trade (look it up) which arranges things so that getting the direction right isn't required to profit, just the convergence of the securities in question.

That + brass balls = victory.

Tue, 04/19/2011 - 20:04 | 1186274 zaphod
zaphod's picture

+10 Thanks a lot, this was a much clearer explaination than the original post.

Is there a reason or benefit in making the position using a butterfly trade instead of simplying going long one and short the other? The simple long/short will also remove direction as a factor...

Tue, 04/19/2011 - 21:26 | 1186431 Mercury
Mercury's picture

If both securities/indicies move in the same direction but at different rates they could still converge but a long/short trade might not be as profitable.  So some arb/butterfly/convergence strategies try to neutralize that risk.

Now that I look at this thing again I'm not really sure why the 2s and 30s are being dragged into this trade (and it's been a while for me with some of this shit) but I think I have the gist of it here.    Don't call your broker just yet though!

Tue, 04/19/2011 - 23:36 | 1186822 Abiggs
Abiggs's picture

Merc, you're slightly off on interpretation of the "butterfly" portion. 

In this case, the "butterfly" is a nickname for the treasury spread incorporating the 2y-10y-30y maturities. You are thinking of the direction-neutral "butterfly" option combination which uses either 4 calls or puts with different strike prices but same expirations to profit from the volatility of the underlying.

Wed, 04/20/2011 - 10:13 | 1187878 Mercury
Mercury's picture

I see, the treasury butterfly trade can be used as a bet that the spread between the middle (10yr) bond vs. it's "wings" will revert back to it's previous, "normal" spread.

Or it's just a clever way to generate six commissions!

Tue, 04/19/2011 - 16:34 | 1185592 No Bid
No Bid's picture

He was basically saying that E minis [the S/P basically] and the ten year treasury have a negative correlation but yesterday they traded together [both down in price due to neg outlook for treasuries etc].  

His bet was that they would reverse to the mean, ie - both up today.

 

Tue, 04/19/2011 - 16:36 | 1185616 No Bid
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It's a simple concept, one that did not need as many securities loaded as he had, nor the lingo he used.

 

Treasuries and equities usually do not fall in price together, so if they do, bet that they will rise in price together shortly, reverting back to the original correlation.

Tue, 04/19/2011 - 16:55 | 1185675 Tyler Durden
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We are glad you made money on the trade.

Tue, 04/19/2011 - 18:07 | 1185914 statist shill
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This is the most I have seen TD interact on the message board.  I like it, please continue to do so.

Tue, 04/19/2011 - 16:04 | 1185460 topcallingtroll
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I wonder if the comments last night.got to you.

Thin skinned, or just bragging now, or what?

Tue, 04/19/2011 - 16:03 | 1185465 Tyler Durden
Tyler Durden's picture

What.comments? If an arb trade does as expected. It is.closed.

Tue, 04/19/2011 - 16:09 | 1185483 topcallingtroll
topcallingtroll's picture

A couple of guys noted it started widening after you posted it.

Tue, 04/19/2011 - 16:13 | 1185496 topcallingtroll
topcallingtroll's picture

Nothing wrong with bragging by the way. You handed me an easy score in cyh recently. Thanks.

Tue, 04/19/2011 - 16:18 | 1185516 Tyler Durden
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Really? Amazing

Tue, 04/19/2011 - 16:14 | 1185506 SheepDog-One
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Jeez you even get criticized for correct calls? Well the trolls are beside themselves with silver and gold busting out like crazy, their anguish and anger is understandable.

Tue, 04/19/2011 - 17:07 | 1185718 disabledvet
disabledvet's picture

arf! arf!

Tue, 04/19/2011 - 16:03 | 1185466 NOTW777
NOTW777's picture

WYNN boing

Tue, 04/19/2011 - 16:08 | 1185489 RobotTrader
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VMW skying 9% AH

Tue, 04/19/2011 - 16:08 | 1185490 HUGE_Gamma
HUGE_Gamma's picture

what kind of healthy pullback could silver do.. 30%?

Tue, 04/19/2011 - 16:42 | 1185639 No Bid
No Bid's picture

easily.  people forget it's not a pure anti-dollar play.

Tue, 04/19/2011 - 16:12 | 1185493 RobotTrader
RobotTrader's picture

IBM lurching higher, up 2%

Tue, 04/19/2011 - 16:13 | 1185502 Dolemite
Dolemite's picture

If the squid showed us anything today....
Buy the rumor sell the news this earnings season

Tue, 04/19/2011 - 17:06 | 1185720 disabledvet
disabledvet's picture

is that a squid washing ashore?  don't see that everyday.

Tue, 04/19/2011 - 16:27 | 1185557 HUGE_Gamma
HUGE_Gamma's picture

anyone hearing this guy on bloomberg.. Piper Intel Analyst is a moron

Augustie Richard

Tue, 04/19/2011 - 19:32 | 1186177 slewie the pi-rat
slewie the pi-rat's picture

ok!  my hair may grow back.  can we buy some Morgan silver dollars now?  pullleeeease? 

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