September 17, 2016
One of the very toughest aspects of this business is you often need to be enthusiastic when you least feel like it…Aside from successes in Soybean Meal, Crude Oil and the Stock Indices this year, my two major opinions in Treasury Bonds and Wheat have more or less represented nothing but pain for many months now, and as I am not some psychologically immune-to-failure superman, it therefore doesn’t make it easy for me to sit here and scream about Eurodollars, “Get short now!! I have never seen a set up like this before.”…especially when the internet and brokerage nitwits are still out there chattering about “rates need to stay low”, implying there should be NO urgency whatsoever in taking the position I am recommending.
But in my experience, that IS when you need that degree of urgency…You take positions when nobody else is taking them. You buy, or sell, markets when nobody else wants to. You take positions when the masses are so uninterested in an idea that options just get dirt, dirt, DIRT cheap. And you do take positions when your most prevalent emotion becomes, “I am sick of this. This move will never start.” And I assure you that doing so, going against all the conventional analytic “wisdom” does NOT require bravery…or so called, “brass testicles”…Going against the crowd…Acting when nobody else is…is just smart trading.
Those are not just words…That is how the markets work.
I look at the Eurodollars (again this is NOT the Eurocurrency), which track short term interest rates, and note that the markets are only anticipating a 1/8 % increase in rates between now and June, 2017, and think, “This IS the one of the most distorted market perceptions I have EVER seen”…Furthermore, I would say that if rates next summer are the same as they are now, it will mean that the US economy…and the World…have absolutely, totally and miserably fallen off a cliff…which, frankly, I think is just plain stupid. AGAIN. THE MARKETS EFFECTIVELY SAYING THAT RATES WON’T MOVE FOR THE NEXT YEAR.
But to be clear, that IS what the markets are about…where mob psychology perceptions do result in incredibly inaccurate assumptions about the future…and thereby influence prices to hit levels that can only be described as “unbelievable” (think $150 Crude, $1900 Gold, $50 Silver, $18 Soybeans, $8 Corn, $2.50 Feeder Cattle or the 2000 NASDAQ Internet Bubble)…BUT…while those markets are on their highs, the masses DO find those prices “believable” and the idea of seriously positioning in the opposite direction, going contrary to 99% of all the talking head “logic”, just seems insane…a great way to waste your money.
IT HAPPENS ALL THE TIME. Mania’s and totally erroneous “logic” DO routinely take an almost unanimous hold on the markets…and VALUES REALLY DO BECOME OUTRAGEOUS…but at the same time, while prices are under this media induced ”spell”, the impact is that people really do not realize how impossibly absurd these widely held perceptions, or price “rationalizations”, actually are…UNTIL AFTER THE FACT. In other words, it’s only later, AFTER the market has declined, and AFTER all the yakheads have “revised their forecasts”, that you find yourself thinking, “How could I have missed that? Why wasn’t I going short? In retrospect, it was SO obvious”.
And guys….This IS obvious… I KEEP HAMMERING AWAY ON THIS BUT I DON’T THINK YOU EVER SEE OPTIONS THIS CHEAP…WITH THIS MUCH TIME…AND THIS MUCH LEVERAGE. THE MARKET ABSOLUTELY DOES NOT “THINK” RATES ARE GOING UP BETWEEN NOW AND NEXT JUNE…AND I THINK THAT IS UNQUESTIONABLY THE MOST IGNORANT AND MISGUIDED MARKET PERCEPTION I HAVE EVER SEEN IN THIS BUSINESS...
I long ago learned that just because I believe something so strongly does not mean I will be right, but I do see this in the same way that I viewed Short Feeder Cattle several years ago…in that I absolutely will NOT be out of this trade…and in fact, I want as much of this as I can reasonably afford…I also want to own puts in heavy multiples, in that I am expecting every option I buy to reach deep-in-the-money status and thereby become fairly close to the equivalent of a futures contract…and I personally therefore want to own a LOT of them…
To offer a precise example, having 25 Eurodollar puts become futures contracts means that every one tick move would represent $625 (25 puts x $25 a tick, or 1 point move)...And when you next consider that the average range in Eurodollar futures has been about 40 points a month for the past year, you begin to get an idea of what having 25 options can mean…i.e., 40 points x $625 = $25,000 a month. Obviously if that movement takes place in one direction…and it CAN (and more) this can mean either making, or losing, money for you, but the point here is, my objective IS to own a position that DOES get in-the-money, and DOES therefore reach those levels of dollar value movement.
How I am positioning at current levels…
So far, my primary recommendation has been to simply purchase the 9900 and 9887 puts in the June, 2017 contract…and I will continue to focus on those two strike prices as long as we are still hovering around the 99.00 area (which I think could change ANY day now)…But what you see below is a variation on buying those options, using Ed’s old “explosion position” approach that involves buying two separate quantities of puts, with the intent of using one set to recoup everything you have on the table…while the second set is kept in hopes of an upward “explosion” in equity.
Here are the numbers…I will explain the strategy in more detail following the chart…
You are buying the June 99.00 puts with the intent of being able to sell them profitably enough (as/if the market goes down) to recoup the entire $1542 spent on both sets of puts…and then still own the 98.75 “for free”. Roughly estimated, I would say this would be possible somewhere around the 9875 area…The potential “explosion” would then be to close your eyes (and your brain) and try to hang on to the 98.75 puts all the way down to the 98.25 to 98.00 area, which would respectively represent seeing about a 3/4% to 1% increase in rates during the next 10 months…which, I would add, is actually my absolutely bare minimum expectation…Obviously, I might be dead wrong…but this IS the expectation I am personally positioning for.
And here is the same strategy, but using a step up in numbers…using $7710 for the basic “unit”…
If you think a 50-100 point move sounds like a lot, take a closer look at the routine size of the moves we’ve seen in this contract above during the last 20 months…And then also take a look at the following 30 year history of interest rate moves I keep showing you in every newsletter. Bottom line? IGNORE ALL THE TALKING AIRHEADS CHATTER ABOUT WHEN AND WHETHER THE FED WILL MAKE THIS OR THAT 1/4% MOVE IN RATES…INTEREST RATES ARE GOING UP, AND WHEN YOU EXAMINE HISTORY, EVEN A 1% MOVE IS REALLY NOTHING AT ALL.
Yes, I have a VERY strong opinion here…and it does not mean I will be right…but YES, I SEE THIS AS A ONCE IN A CAREER (CERTAINLY IN A DECADE) OPPORTUNITY. I say that none of us will ever see rates this low again…and you therefore WON’T ever see a trade like this again.
If you’ve read this far, don’t just sit there and think, “Maybe he’s right.” Do something with it. And if you already have some, I say get some more.
Pick up the phone and call me…The bulk of my energy goes into research and putting this thing together…trying to show you here exactly what I believe…and why…and what you can perhaps do with it…
CALL ME AND GET SHORT THIS MARKET.
Thanks and Good Saturday Afternoon,
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars