BUY HIGH/SELL LOW
February 8, 2023
–Back in the early 1990’s the FBI infiltrated the currency pits to uncover wrongdoing. No kidding. I think they might have gotten some sort of minor conviction after spending a LOT of money, but the thing I remember is someone saying, “I just don’t understand how this new guy is lasting. He’s a terrible trader. He loses money constantly.” Yes, an FBI agent. They honest-to-God bought memberships and put people into the pits. I’m not really doing the story justice; it deserves much fuller treatment, and I suppose one could draw the conclusion that I am going to use this anecdote to make fun out of some government entity (the Fed perhaps?) that marshals huge resources into schemes that don’t really pay off. I didn’t watch the State of the Union, but I’ll accept Gundlach’s summary, “Let’s spend more money”.
–However, I am not really making fun out of the gov’t (because it’s not a laughing matter). What the FBI guys didn’t really learn is the old adage, ‘buy low, sell high.’ I’m not going to kid you, it’s a tough one. The other gem is, “trade with the trend; the trend is your friend.” So, this year, the trend has been for higher rates. Maybe, just maybe, we’re nearing the end. But we’re seeing roller coaster price action around Fed events, and yesterday that was certainly the case in equities. But in terms of the buy low, sell high thing, let’s rewind back to Fed day: On Feb 1, SFRZ3 9550/9750 c spreads were bought in huge size, 33 to 35 (90k). Settled 40 on that day (43.25/3.25) ref 9568.0. Yesterday that same spread settled 22.75 (24.75/2.0) ref 9524.0. Buy high.
–Uh-oh, someone notices that the trend is for HIGHER rates. And so yesterday, after a 37 bp plunge in SFRU3 since the FOMC, there was a buyer of 110k SFRU3 9450/9400p spreads for 5.75 to 6.0. (Setted 6.0 ref 9493.5, 8.0 and 2.0). Sell low? There could be a lot of good reeasons for this trade: buying protection against higher rates on a much larger portfolio, for example. There are five meetings that will directly impact SFRU3 (if the Sept 20 meeting is included, which occurs just after the IMM date). Current target is 4.5-4.75%. For the put spread to fill in we’d need 6.0 to 6.25%; a hike of 25 at every meeting would be 5.75 to 6.0, and certainty of 25 at the Nov 1 meeting would likely have SFRU3 around the 6% strike. Make sense with Powell saying we’re seeing progress in terms of disinflation occurring?
–Lots of Fed speakers today. Let’s try to stick with the old lessons, ok servers?
