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):



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Mercury's picture

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

Tyler Durden's picture

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

topcallingtroll's picture

The less i obsess the better i trade. It has been hard not to obsess thru this insanity.

HUGE_Gamma's picture

what about the 3 tick momo floaters?

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.

The Axe's picture

over my pay grade....Jesus

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?

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.

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...

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!

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.

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!

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.


No Bid's picture

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.

Tyler Durden's picture

We are glad you made money on the trade.

statist shill's picture

This is the most I have seen TD interact on the message board.  I like it, please continue to do so.

topcallingtroll's picture

I wonder if the comments last to you.

Thin skinned, or just bragging now, or what?

Tyler Durden's picture

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

topcallingtroll's picture

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

topcallingtroll's picture

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

SheepDog-One's picture

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.

HUGE_Gamma's picture

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

No Bid's picture

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

RobotTrader's picture

IBM lurching higher, up 2%

Dolemite's picture

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

disabledvet's picture

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

HUGE_Gamma's picture

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

Augustie Richard

slewie the pi-rat's picture

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