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An interesting trade idea out of Merrill Lynch's RateLab, courtesy of Harley Bassman
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Can you include the pdf please.. all types of storage media are firewalled @ work
can someone tranlate? how do you act on this?
It's a little over my head, too. From what I gather, it is a play on treasury volatility that pays out if QE runs treasuries up and deep out of money puts provide downside price protection if yields rise, and the coupon and price upside is the reward if the strike isn't hit (?).
The convexity stuff just means that the payout isn't linear... it follows the yield curve, so the derivative structure is built to make the payout more straightforward for "stock jockeys".
As I understand it, this is not a variation of the steepener trade, as he is playing with multiple maturities on the curve. This would be hard to replicate.
That is, if I got it.
Not to be all paranoid and shit, but if Merrill is trying to sell me an idea, I just assume that its damaged goods.
(ps -If I had the time or energy, I would track this trade over time to see if it works).
thanks Tyler. very interesting stuff. This is a nice counterpoint to David Einhorn's idea to buy otm options betting on a huge rise in U.S. and Japan long rates.
Great trade; thanks. I wonder if the disparity in skews is similar in the 5 and 10yr options on futures market. I like the concept very very much. At the end of the day this is a well structured short vega trade. I like it.
thank you for posting.
for people who are not following. It's a call ratio spread on a longer rate. You make a bit money if rate stay low or rise a bit. You make a lot money when rate moved quite high. You will lose a lot of money(actually unlimited) if rate rose MASSIVELY in short time window, which is a small prob event. You will surely lose money if skew continues to go steeper.
Yeah, that's why I would rather do a play like this with the OOF's where you have more structuring leeway and liquidity. You could do their ratio spread or you could create an uneven condor and limit your losses by just buying some further out of the money protection. I like the trade though, the only problem is that the fed will not be able to control the long end of the curve, however, it does seem that the IV is a bit on the high side and this could most likely turn out to be a great liquidity arbitrage trade (which in the end is a short vega trade).
Am I correct in viewing it as a trade on the shift (not necessarily shape) of the yield curve, pivoted around the 10yr?
Thx