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Old Aug 16th, 2010, 12:49 PM   #55
shortie
 
 
Join Date: Apr 2006
Posts: 6,711
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Quote from tradingjournals:

We will see how you will do on this trade. You are long bonds as of Friday 13, 2010. Time reveals everything in trading. From your tone, I have a feeling that the market might hit you on your nose, but I wish you a better fate.
TLT +2% today
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Old Aug 16th, 2010, 12:57 PM   #56
tradingjournals
 
 
Join Date: May 2010
Posts: 4,496
Quote:
Quote from shortie:

TLT +2% today
His followers will buy today, so the clock will start tomorrow for P&L. Also, use the 10-year and not the 20 to 30 years. Keep the score Shorite, we need a fair arbiter.
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Old Aug 16th, 2010, 01:02 PM   #57
Daal
 
 
Join Date: Oct 2002
Location: Brazil
Posts: 9,144
Quote:
Quote from The Big D:

No it's not.

Let's say I buy 2's today, betting that the economy will go nowhere. So I keep them for a year, collect my 1/2% yield, and if rates stay unchanged that's my best scenario - I've made 1/2%.

The worse scenario is that the fed raises rates to say 3% over the next year, which is very plausible considering what the fed's moves were coming out of the last recession. As a result, the value of my bonds drops maybe 3% and after clipping my coupons I'm down maybe 2.5%.

In other words, I've got an interest rate risk that's 5x my best case scenario profit. That's pretty horrible. Obviously back of the envelope, but the point is that the risk in long bonds HUGELY outweighs the reward if you're right.
The reason the risk reward is bad is because its obvious to the market what is going to happen, risk reward is an overrated trading concept, what matters is the EXPECTATION. I would happily sell naked options all day as a long I was quite confident my premiums we're too high and I'm properly capitalized, even though the avg ET would hammer that strategy and say my risk reward is bad
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Old Aug 16th, 2010, 01:05 PM   #58
The Big D
 
 
Join Date: Nov 2009
Posts: 487
Quote:
Quote from Daal:

The reason the risk reward is bad is because its obvious to the market what is going to happen.
Except it's not obvious. For example, US equities still have a fair amount of growth priced into them. Those two markets are of roughly equal size, and they can't both be right. I don't claim to know which is right and which is wrong, but in order to make money I really don't need to know.
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Old Aug 16th, 2010, 01:07 PM   #59
The Big D
 
 
Join Date: Nov 2009
Posts: 487
Quote:
Quote from tradingjournals:

His followers will buy today, so the clock will start tomorrow for P&L. Also, use the 10-year and not the 20 to 30 years. Keep the score Shorite, we need a fair arbiter.
Shouldn't we use the 2s since those are the ones with < 1% yields, which is what this thread is all about?
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Old Aug 16th, 2010, 01:17 PM   #60
tradingjournals
 
 
Join Date: May 2010
Posts: 4,496
Quote:
Quote from Daal:

The reason the risk reward is bad is because its obvious to the market what is going to happen, risk reward is an overrated trading concept, what matters is the EXPECTATION. I would happily sell naked options all day as a long I was quite confident my premiums we're too high and I'm properly capitalized, even though the avg ET would hammer that strategy and say my risk reward is bad
In your option trade, probs on your OTM short options are more than 50% on your side, and they rise with time. In Big D, one can assume 50-50. So it is not the same comparison.
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