Thursday, May 31, 2012

Stand by

Just an FYI that I didn't launch the blog then abandon it.  There was some additional market data I was trying to obtain and just kinda focused on that (and travel, trading, etc...).  But I'll roll out some additional stuff in the next few days.....

Monday, May 21, 2012

Millennium Fly

One of the most legendary moves at the CME easily involves the "millennium fly" which was a butterfly spread based upon the September 1999, December 1999 and March 2000 eurodollar contracts.  The fly was a concentrated play upon interbank funding at the turn of Y2K and became far more volatile than any such spread before or since.  

Click to enlarge

Like most eurodollars butterflies, the millennium fly had a typically tight range but suddenly exploded upward in November 1998 from about 20 to over 80 in about a months time with the majority of the move coming in a couple weeks.  Even though it was before my time in Chicago, it still hurts to look at the chart knowing the pain such a move could and did inflict.

I don't know if the catalyst was a desk trade recommendation at the time of the breakout but the web magazine Derivatives Strategy noted in the following article: A Trade for Millennium Jitters

"The underlying justification for the trades is that investors may express their aversion to Y2K computer snafus by moving money out of deposits in software-laden banks and into fixed-income securities, such as Treasuries or bearer paper. This could put a squeeze on bank liquidity and drive up money-market rates in December 1999, relative to levels in either September 1999 or March 2000. To take advantage of this spike for the eurodollar, Sturm is recommending selling two December ‘99 eurodollar futures and buying one each of the September ‘99 and March ‘00 contracts.

“If you analyze the performance of a year-end ‘butterfly’ over the last 10 years, you can see that, with six quarters to expiry, you have a 90 percent confidence that it will be priced between one tick and 15 ticks,” says Sturm. “By that stage this year, however, the millennium eurodollar butterfly was trading at 18 ticks, which you can approximate as the price tag that the market is putting on the potential financial disruption of Y2K.”

Click to enlarge

As the article also noted, there was a similar scenario in the Japanese interest rate market and the trade to focus on Y2K funding in the euroyen was known as the "dragon fly."  This trade was structured differently because of the March 31 fiscal year end in Japan and the dragon fly was positioned like an unratioed condor EYU99-EYZ99-EYH00+EYM00.

Really amazing stuff and another case that the only thing that matters is liquidity.  Just as amazing is that the desk recommended the trade at the beginning of the move.

Thursday, May 17, 2012

VA Linux

With a lot of Web 2.0 companies going public lately and some talk of a speculative bubble, I thought it'd be good to illustrate the apex of insanity during the first dotcom bubble w/charts of VA Linux.  In December of 1999 the open source software company became regarded as the most 'successful' IPO of all time with a pricing at $30/share and an opening print of 299, traded as high as 320 but then closed at 239.25 on the day.

 A couple articles from the web 1.0 media recap what happened first in real time and then a decade later:

 Dissecting the VA Linux IPO from

10 years gone: The VA Linux Systems IPO from cnet

Click on chart to enlarge

Pretty wild that at the end of the day LNUX had a market cap of something like $7 billion and that year only did around $20 million in revs reporting a loss, of course, of around $15 million.  Of course it wouldn't last and within a year the stock was under $10.   By the time the lockup expired six months after the IPO it was just a little bit above the IPO price of 30 by trading at 38.50 which is really tough luck for the insiders. 

End of Lockup Period for VA Linux Doesn't Feel Too Liberating

Click on chart to enlarge

That era was a wild time and while I was too young at 19 to get a piece of it but as a consolation I was able to witness some of the insanity being on an order desk at the CME directly below the NASDAQ pit.  In the future I'll roll out some more dotcom stocks but am trying to stick to futures.

Believe it or not, VA Linux still exists in some form as it was bought by Geeknet now under the symbol GKNT.


Alright I'm gonna kick off the new blog with a more recent extreme move that totally changed my perception of how short term interest rate futures can trade.  Simply put the value of a contract is 100 - value to equal the interest rate, for instance Sept 2012 eurodollars are currently 99.40 which indicates an interest rate of 0.60%.

In late 2011, the euroswiss contract (3month libor rate on swiss franc borrowing) traded as high as 100.71 on August 18th indicating a negative rate of 71 basis points!  It's quite apparent from the chart below of the Dec 11 Euroswiss contract that once it pushed through the zero barrier, the liquidity thinned out and a parabolic move ensued.  (Click on charts to enlarge)

Somewhat confusing for me is that euroswiss peaked on August 18th but the actually currency itself peaked on August 9th. 

On September 6, 2011 the swiss franc was effectively pegged against the euro w/a floor of 1.20 and on that day the CME's SFZ11 had a range from 128.54 to 116.37, closing on it's low.

As always, I'm looking to be enlightened in the comment box if anyone can add anything further beyond the obvious.  There isn't much written on negative interest rates but I simply presented these charts to show the chaos of a liquidity squeeze.  FYI, euroswiss is still indicating a slightly negative interest rate at the moment.

As General George Patton noted, “Fixed fortifications are a monument to the stupidity of man" and the same goes for fixed market ideas.