I do this quite often. This is bid up to offset the speculators who are betting on a rate cut. This only happens in an enviorment of rapid rate changes Also , look to see on Monday if there is excess demand for funds. If there is nothing significent it is a great trade. Usually only good for 1-2 pts. 8pts is a gift.
effective FF 1.48, some stealh easing by the fed, you guys are selling puts here, who knows what will happen http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm
i am out for a nice profit. it is usual that ff comes lower on days like friday, i.e. there were money available right from the morning which takes down the average. also in practice fed does not completely control the effective rate on day-to-day basis. i expected more like 1.80. but 1.48 makes this trade to not have enough juice for me - just 2bps. + you are effectively selling short term at-the-money calls on top of that....
dont you think its a little dangerous given the stealth easing the fed has done now two days in a row. Libor and ted spreads remain high. I dont think there is a law that says the fed cant target sub 2% for a while when money market tensions are high
I'm highly skeptical you can find 'obvious' mispricings in such a liquid and highly observed market such as front month FF future
i am not saying it is being mispriced. i say that odds are good enough to enter the trade. it will not be mispriced till 98.55 but at 98.07 the value is good. my guess is that tomorrow we see that ff was closer to target bringing more sense to ff market - if not i will likely exit flat anyway...
ff traders already take into account risk/reward, its part of the price. so you are saying you can make a better judgement than them what are the odds of further stealth easing or a emergency cut. I dont think there is any reason to believe the contract is trading at the wrong price. why do you think traders arent jumping in at this low risk opportunity here. the people who are buying these contracts at this price have a reason to do so