What Trading The Spike Higher In Interest Rates Was Worth

by: Peter Knight

Summary

Trade 1 = +54.43% (entry date 1 September 2016).

Trade 2 = +91.67% (entry date 22 August 2016).

Trade 3 = +85.00% (entry date 29 August 2016).

Over the last month the market has gone from pricing in 2, 0.25% rate hikes between now and December 2020 to 6, 0.25% hikes.

Updates for the actual trades posted here on Seeking Alpha 5 September 2016

Trade 1, +54.51%, the A,B,C's for this trade on the chart below.

A) Entry date: 1 September 2016
Short December 2019 delivery (GEZ19)
Entry price: 98.6150
Allocation valuation = $3,462.50
Exchange margin requirement = $510
I allocated $3,462.50 to avoid any margin issues.
Market's anticipated rate by December 2019 was 1.3850%

B) Update 18 November 2016
Contract price 97.8600
Market's anticipated rate by December 2019 = 2.1400%
Allocation valuation = $5,350.00
Open Trade Equity = +$1,887.50, +54.51%

C) Fed Guidance on 21 September 2016 (Pre Trump Victory)
If the Fed is right about the rate the contract price will fall from 97.86 to 97.00. The allocation valuation will increase from the current $5,350.00 to $7,500.00

Current chart and quotes to monitor this trade moving forward

Trade 2, +91.67%

A) Entry date, 22 August 2016
Long December 2016 (GEZ16) 99.0450
Short December 2018 (GEZ18) 98.8200
Expecting the spread to increase from 0.2250
Allocation valuation = $1,500.00
Each 0.01 change = $25.00 per position
Exchange margin requirement = $470 per position
Contract value = $562.50
I allocated $1,500.00 or nearly 3 times the total contract value to avoid margin issues and have the option to add positions.

B) 18 November 2016
December 2016 (GEZ16) contract price 99.0200
December 2018 (GEZ18) contract price 98.2200
Spread = 0.8000, premium to GEZ16 over GEZ18
Allocation valuation = $2,937.5
Open trade equity = $1,375.00, +95.83%

C) Fed Guidance on 21 September 2016 (Pre Trump Victory)
If the Fed is right about the rate they set this spread will widen from 0.80 to 1.50. The allocation valuation will increase from the current $2,937.50 to $4,687.50

Current chart and quotes to monitor this trade moving forward

Trade 3, +85.00%

A) Entry date, 29 August 2016
Long December 2016 (GEZ16) 99.0550
Short December 2020 (GEZ20) 98.5050
Expecting the spread to increase from 0.5500
Allocation valuation = $2,500.00
Each 0.01 change = $25.00 per position
Exchange margin requirement = $525 per position
Contract value = $1,375
I allocated $2,500.00 nearly 2 times the total contract value to avoid any margin issues and have the option to add positions.

B) Current prices 18 November 2016
Long December 2016 (GEZ16) contract price = 99.0200
Short December 2018 (GEZ20) contract price = 97.6200
Spread = 1.4000, premium to GEZ16 over GEZ20
Allocation valuation = $4,625.00
Open trade equity = $2,125, +85.00%

C) Latest Fed Guidance (21 September 2016 Pre Trump Victory)
If the Fed is right about the rate they set this spread will widen from the current 1.40 to 2.60. The allocation valuation will go from the current $4,625.00 to $7,625.00.

Current Chart and Quotes to monitor this trade moving forward

Latest Fed guidance (Pre Trump Victory, 1 minute 29 seconds)

For more information see my report on Seeking Alpha posted 5 September 2016: "Market Versus Fed Expectations For Rates Through December 2019"

Report content

  • What we're trading and how to capture the move higher in rates
  • Full disclosure of trades including entries, risk and objectives
  • Fed videos providing guidance where the Fed sees and when

Reports on deck

  • Extreme fundamentals that will impact all of our portfolios
  • Defined risk trading strategies for capturing major moves
  • Hedging a hemorrhage and/or capturing the move lower in stocks
  • US economic reports fact or fiction
  • Trading the coming trade wars
  • Trading precious metals using defined risk strategies
  • Generating income writing credit spreads in energy markets
  • Updates on automated trading programs
  • Understanding changes in implied volatility
  • The risks and rewards of trading vertical credit spreads, short butterflies, short condors, ratio call back spreads and ratio put back spreads as implied volatility spikes before earnings announcements.

Disclosure: I've been a professional trader and run a family office from Tortola, British Virgin Islands for the past 20+ years, zero income, corporate and inheritance tax and would like to keep it that way. Because of the potential tax implications I do not manage US accounts or sell advisory services to US clients.

I do however manage funds for a limited number of qualified non U.S. investors. I may at times for my own accounts or for the accounts I manage have positions on that could be contrary to the ones mentioned in my reports.

Disclosure: I am/we are long AND SHORT THE MARKETS IN THIS REPORT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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