Home > Technical Topics > Strategy Development > credit trading? itraxx? cdx? anyone?

credit trading? itraxx? cdx? anyone?

  1. is credit a topic here on the board?
  2. Tell me how to get exposure? I'd love to trade credit especially if some Hedge funds are forced to liquidate

  3. well, you know, that is the point. there is no "mini" yet ...
    your post indicates that you know what i mean ... where do you have the info from, if i my ask?

  4. In my previous life I was a quant/trader at a bank. I love the idea of credit derivatives but thought it was difficult to trade on a small balance sheet. With the start of these credit indices I thought maybe just maybe they would be listed on something like CBOT, CME DTB?

  5. trading the indices on an exchange is an inevitable next step. question of (i hear you!) ... time.
  6. I think that if hedge funds or whoever is taking pain then when they start unwinding spreads shoot out and thats normally the best time to put those exact trades on?:D
  7. actually this is the reason why i currently look at it. it looks like recent moves of implied corrs hit some of the equity buyers quite a bit. nevertheless i am still not sure what to think about this market as whole (most important reason is that so far i never looked in detail on the tranched indices). i mean the whole concept of implied correlation is really subject to discussion. let me explain:

    1. the models behind cdos are substantially complex, maybe not conceptually, but by the shere number of varibles. hundred obligors, hundred recovery assumptions, (100*(100-1))/2 pairwise correlations. sure you can reduce nmber of variables by aggregation, but if you have it on your book, you are long the whole complexity, not jsut your assumptions.

    2. using correlation as the "implied" output, leaving all others, (defaults, recoveries) constant is a fine solution. another would be impied avg default rate or implied recovery rates. implied correlation does sound better, but it is not probably not reflecting true correlation of companies.
    just look at five years senior pieces, once with basis corr, once with gaussian view: 0.6 corr vs 0.25 = gimme a break when you talk about "implieds". can you imagine that black scholes says "15%" IV and cox rubinstein claims "30%"?

    3. in a "normal" market, like lets say, stock indices, you have a derviatives market that has some natural link to the spot market. and they interact pretty much straight forward (future price being a more or less exact function of spot circumstances). in credit you have a whole part of the market absent, namely the buy side of synthetic tranches. clients of investment banks buy these tranches, yet teh banks themselves hedge via the indices. thus the indices see one part of the synthetic market, but not the other.

    all these issues make me wonder if the credit market will react in a mean reverting way, after some activity took place in one part of the corr-curve ... or if it is more a panic stampede once people realise that the science is not what they hoped it would be.

    actually i have not idea how smart the funds are that recently bought equity. i mean in the end they are short defaults and we haven't seen too many ... and yes, they are long corr, but one really has to worry if they get shaken so "easily" ...
  8. I really laughed at the comment about IV being 15% or 30%. I take your point about about some many variable. If you ask me IMHO there is not enough data to estimate correlations. The correct mathematical place to look is into the theory of copula's.

    I am extremely skeptical of pure mathematical traders. Anyone who takes a huge leveraged position based on a "model" needs his head read.

    Remember LTCM with we are vacuuming pennies do me a favour.

    The credit markets scare me because I lot of the buy side are funds or banks that think they are clever. Basically over confident in their own ability. The traders concerned probably figure well if I make money I get a bonus if I blow up I write a book about it.

    Still would love to know what names to look at if these markets blow and credit spreads blow up, any ideas.

    I read that GM's bonds are trading at a spread that implies a cumulative probability of default of 54% over the next five years. Is this really the probability of default or is the reality a lot lower.

    I might have a small balance sheet but can still trade single names via their corporate debt or via the convertibles.

    Not sure if its true but people are banding around 70% of convertibles in the hands of Hedge funds. Will be some lovely opportunities if their are forced liquidations.

    Again which converts are relatively liquid?

    personally I don't think we have hit a crises yet, we need a public very big bad failure of a bank HF etc first. Then be ready to pick up some bargains.

    If I remember correctly Buffet offered LTCM R600m to take over their book unseen. Would have double his money in a few months. Of course they didn't take him up on it. Nice try though


  9. i do not think the data is really the key issue. it is simply that correlation is too volatile. estimating it over 5 years is next to guessing.

    i think a smart investment bank has an edge since they are bigger than any fund, thus they call their desk covering a certain company or industry and can derive a much more precise picture on corr, default and so forth.

    LTCM is a special thing. too much ambition plus five sigma event ... well. i would not damn the principle (mathematical?) approach due to that. ...
  10. actually their market impact was probably the least modelled thing at LTCM ...
  11. Don't mean to damn the mathematical approach. Just too much reliance on it. Thats all. Corr is exstremely volatile. I have doubts whether something so unstable exists.

  12. this wonderful sentence makes my day. thnx a lot.
  13. :confused:
  14. "... I have doubts whether something so unstable exists. ..."

    i am serious. i find the idea that corr does not exist because it is too unstable wonderful. and your sentence is philosophically ... inspiring.


    you are european???
  15. Yes, I must admit I find this medium a bit difficult. It was a bit of a strange sentence.

    I am very sceptical of anyone who thinks that they can trade something that they can't measure. Or you have exstreme difficultly measuring. Perhaps we should just accept that it doesn't exist in any meaniful way?
  16. well, if you believe this is a temporary dislocation that will revert to "normal" soon - be a hero and sell equity protection vs. buy mezz. You can be delta neutral (at least in theory), pick up 200-250 bp carry, and take out enough cash to account for about the first 3 defaults in the CDX index. Whatever desk you do this trade with will love you - make sure you at least get some high class strippers out of it.

    On the other hand, if you believe that this whole thing is an augur of even worse credit contagion ahead, then just buy mezz protection. It's so cheap right now. I guarantee you can't lose money. I want you to drive out of here in a new synthetic tranche today. You have to ask your wife? Come on, who wears the pants in this family?
  17. sle

    seems you had some experiences with salesServices ...

    well, honestly speaking she wears pants today ...
  18. I am gonna do the first one I want some high class strippers:D :D

  19. btw why do i think i know you from somewhere?
  20. done :)
  21. Look at LQD and IEF and the spread between them.

  22. Okay that appears to be a huge spread.

    Short LQD and go long IEF?:confused:
  23. other thing. someone is currently getting heavily burned on equity pieces in the tranched indices. rumors tell it is either one of the big corr desks or a big fund. losses in magnitude of nine figure losses ... anyone following this?
  24. Christ that is bad :eek:

    Sure we will hear in next few weeks.

    Might be oppurtunities if they are forced to liquidate
  25. i would guess it will get public soon. itraxx corrs for equity came down dramatically. but i would not bet on too quick mean reversion ...
  26. Long LQD short IEF, good luck doing any real size though. Any idea why the exploding spread?


  27. When I realised that I had it backwards it was too late to edit.
  28. looks like we have a race between corr desks, hedge funds and corr desk risk management when it comes to the marks for credit equity products for this month.
  29. I don't get it?
  30. the funds are marked to market, but for bespoke tranches there is no "market". where do these positions have to be marked??? who are the counterparties? what does the risk mgmt of those counterparties intend? ...
  31. Mark it at what ever preserves or gives me the biggest bonus