I am interested in setting up some long-term positions - maybe for 2 or 3 years. Do you think this is possible or is it better to place a series of shorter term bets, say every few months, and take small losses on most of them while waiting for the big winner which could be a a couple of years out.
Eurodollar strip is colored like this (all in reference to quarterly contracts) - contracts 1 to 4 are the "whites" (currently U2 to M3) - contracts 5 to 8 are the "reds" (currently U3 to M4) - contracts 9 to 12 are the "greens" (currently U4 to M5) - contracts 13 to 16 are the "blues" (currently U5 to M6) - contracts 17 to 20 are the "golds" (currently U6 to M7) - contracts 21 to 24 are the "purples" (currently U7 to M8) ... Purples are followed by oranges, pinks, silvers and coppers, if one's really into it.
It is absolutely possible. Obviously, the reasoning behind such a trade will need to take into account the holding period. In general, I think it's very healthy to try and diversify across time horizons and have trades of all sorts. The beauty of Eurodollars is that, with futures and options, there's soooo many combinations and playoffs you can construct, it's not even funny. The drawback of Eurodollars is that it's a very liquid and mature mkt, which means that there's a lot of people looking at it. Most of the time it's very hard to find genuinely good trades.
So are you saying most opportunities are changes in perception on where rates may head or, maybe where the economy is heading....great thread...looking forward to this discussion.
Yes, that's right... There's also a new dimension that's been somewhat key after the financial crisis, but isn't too important right now. Specifically, Eurodollar prices also incorporate a proxy measure of the health and liquidity of the banking system, i.e. the LIBOR-OIS spread. There are a few other nuances, such as "the turn", etc. P.S.: In my previous post, I meant to write "payoffs", not "playoffs". Stupid spellchecker.
Obviously most interest rates are extremely suppressed right now (with the exception of some European ones), as well as biased by central bank interventions, so we have the potential for truly enormous moves. I believe we will see them some time in coming years. Spreads are a good way to position for these. For example, one can even sell volatility using option spreads with protection, but add cheap extra wings so that that the position would actually make a lot of money on a really large move. Of course, there is a middle ground where it would lose money, but the overall position supposes a bimodal (or trimodal) distribution, or fat tails if you will.