also keep in mind that if there is a emergency rate cut its will be a big one. 50bps at least. so the idea that there is a risk premium to fading emergency cut expectations doesn't seem all that great, you can bet a lot of quant guys must have analysed this and removed an inefficiency like that from this market
are you serious? by your reasoning you would never enter any trade... just look at the time this thread was started - before the last fomc meeting. at one point during the meeting day the sep ff priced 50/50 prob of 50bps cut while oct probability of 50bps cut was lower! (i.e. pricing in hike in oct). was it mispriced? NO. was it stupid? you bet! that said there are fundamental reasons why this trade is really good. if there is a cut in sep then it will not come from the blue sky. there will be 2-3 days stress in the markets pushing ff effective rate up lowering the downside. in fact that's when the trade will perform the best - when we have some mess within the next week - particularly this friday. read some research on behavior of fed fund market if you really want to trade it and don't just bet on cuts/hikes. i remember fed people wrote some. cheers
of course i keep it in mind - that's the major factor in this trade. i trade in rates for quite some time...
My points are based on just statistical facts. Most people underperform the market(hence the 'collective wisdom' of markets), that should apply even more on markets that dont bring out the worst in people(like the stock market with dividend yields and turnaround stories that turn people's greed). You are betting that there is a risk premium on fading emergency fed meetings without a very good reason(like a special insight on how the fomc thinks). I'm quite sure that you are wrong You are selling insurance, your premiums keep you thinking you are doing it right, then one day its all gone and you are down huge
whenever you buy an instrument (e.g. ff rate) long you are in a certain sense selling an insurance. i am aware about special optional aspect of fed funds (see above) - and likely more than you are as i trade it for years (as oposed to you: http://www.elitetrader.com/vb/showthread.php?s=&threadid=133254&highlight=dhpar+fed+fund). anyway you are getting me bored - and i will certainly not explain to you anything more (Daal). pearls before swine we say...
And the market is getting it DEAD RIGHT so far http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm