just checked and the US Dollar index is in backwardation ....dec-mar..... gee Ben, they're gaming your rate moves
Ya, but when you are short gamma in the form of short straddles you have to hedge by buying futures on the upside at your pain point and likewise doing the opposite on the downside. I do understand the point you are trying to make. As it gets to say the DAY of expiration they will play games by trying to pin it exactly. As for Goldman, they are selling straddles out into March 2007, so it is a little different game and part of a larger position. My brother used to work in Eurodollar options and said the biggest customer in the pit was short something like 100,000 straddles and in the last 5 minutes pinned the futures to the strike with 100,000 up in futures. Basically said if someone would like to unpin me try.
This is a perfect example -- so fine, the options expire worthless and the profit is taken, but then they need to unload 100k futures. How do you do this without taking a loss greater (or much greater) than potential losses selling those straddles?
In that specific situation the guy obviously wasn't hit on 100,000 futures (was just locking up the market showing that size on both bid and offer where he pinned it) and all the major players knew what was going on so didn't touch it. As for say when they are hedging their straddle in Treasuries they do the futures at that level in hope of just scratching them as the market slingshots back to their strike. The major risk is a headfake. For example, lots of guys are short the Dec 108 straddle and their pain point is about 8-10 ticks either way. You buy futures at that level to hedge if the market continues trading to 107/109 or so, but ideally you would like the market to trade back toward 108-00 and sit there. Worse case scenario would be if futures traded 108-10, then 108-09 or a bit lower, then shot back above 108-10 before going to 108-20 (vice versa for below 108-00 using 107-20 as the pain point). This situation could leave some locals unhedged if they already sold out their futures hedge at a scratch.
Got it. so wasn't actually entering 100k contracts. just showing it on the bid and ask. pretty ballsy. really high stakes poker. VERY high stakes.
Mcurto, Have a look at the "Multi-price flipping" thread in the Eurex forum; towards the end there's talk of Brumfield doing some flipping.
Ya, it is a standard practice for big locals in all bond markets, especially long end contracts like the Bund, US 10yr and 30yr. Just a way to try to catch all the smaller locals off guard when there isn't any paper around. Although it would be Hardy Brumfield, pretty sure Harris is doing very little, if any, trading since he has been running TT.
It occured to me -- whenever we have no idea why its selling off (like that one day a week and a half ago), perhaps the answer lies in Chinese diversification away from treasuries... selling into strength.