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Friday, 1 February 2013

Start of a new month, so updating positions and thoughts – hence something of an essay.

NAV cob 01Feb13            110.7
            Single stocks
                        BP.L                        Long 10,000
                                                Short 10 Mar 470 calls
                        RR.L                        Long 7,000
                                                Short 7 Mar 920 calls
                        ELTA                        Long 3,500
                        PIN                        Long 6,500
SXX                        Long 225,000
                        The rally has effectively closed out the Rolls Royce long (deep in the money now) and BP is going the same way – depending on what happens with the negligence case in the US courts. Electra and PIN are still trading at unjustifiable discounts to NAV, even though every business they sell is going at a premium to NAV, so I’m keeping these for now.
Sirius is pure option premium. They need regulatory approval for a potash mine in Yorkshire – if they get it they’ll have a great position as a low cost producer of potash, bringing a lot of employment to a deprived area (amongst other things). High risk, but at least 4:1 on the upside in the long term.
No changes imminent here – if the rally closes out the BP and Rolls Royce positions that’s fine, if not then wait till expiry and sell covered calls again.

            GBP rates
                        Short 100 L M6, average price 98.735.
                        Short 20 G H3 (March gilts)
                        The short in gilts seems a better way to express this trade than short sterling, given the supply/demand situation, the likelihood that further UK easing is more likely to be FLS than QE, and the fact that the gilt market is crowded with flight-to-safety buyers who are realising that they’ve been running into the burning cinema rather than out of it.  I think this argues for switching the L M6 position into gilt futures when the opportunity arises.

            Single stocks
                        8316                        Sumitomo Mitsui            long 2000
                        9101                        Nippon Yusen                long 40,000
                        9104                        Mitsui OSK                    long 30,000
                        9107                        Kawasaki Kisen             long 55,000
                        NIH3                           long 25 (Simex Nikkei)
                        NIH3 11k calls            long 20
                        NIH3 11.5k calls         short 20
The Nikkei still looks like the equity market with the greatest upside, as it’s chronically under-owned and ridiculously cheap, more so relative to JGBs than in absolute terms. The NIH3 position should probably be larger than it is (esp if I get taken out of some of the UK equity positions listed above). With Nikkei vol so high, selling puts or doing covered calls is the way to go.
The Sumitomo position is about 1/5 of what it should be, as the megabanks are such a leveraged trade on reflation. The basket of shipping lines is more of a special situation, which I’m not going into here as it will take too long.

            JPY rates
            Nothing. Ideally I’d still have the IRS steepener 5y 3y forward against 5y 20y forward (positive roll on both legs, and structurally short the back end, which is where the slow-motion JGB meltdown is already running). Not accessible via futures only though, so this is off the menu.

            As an aside, a short in long dated JGBs would be close to being my favourite structural trade right now. The BoJ seems nowhere near to buying the long end, and the bear market has already started. Higher USDJPY, inflation pressure and the risk of reflation running out of control, and the calamitous state of public finances are some of the key factors in favour of this trade.

            JPY currency
            GBPJPY            long 0.75m

            GBP is still suffering from the overhang of safe haven flows, or so it seems. The trade is to switch into an equal basket of USD and NOK (can’t bring myself to buy EUR). Besides, NOK is probably the first central bank in the world to actually start raising rates, so NOKJPY is a great cross to own from that perspective (and others). The short side in JPY speaks for itself. There’ll be no let-up in the pressure while Shirakawa is still running the BoJ, as people will hang their hopes (maybe correctly) for further jpy weakness on getting an ultra-dovish successor. 


            ESH3                              long 100
            ESH3 Feb 1470c            short 50
            ESH3 Feb 1475c            short 50

This is just a synthetic short in the Feb 1470 puts and 1475 puts with 2 weeks left to run (I took off the 1475 puts on Wed as I had too much tail risk ahead of payrolls, but reset it again this afternoon right after the number for a net cost of 2 points : cheap). These puts have halved after payrolls, now that the event risk of payrolls is gone and since the market has rallied too.

            ESM3 Mar28 1440 call            Long 100
            ESM3 Mar28 1470 call            Short 100

Bought this call spread today for 6.5 points (30 points wide, so about 5:1). This is really cheap upside exposure : the market still seems underweight in stocks (there was almost no noticeable month end re-weighting trade : you’d have expected an equity selloff and fixed income rally after the moves in Jan. Instead we got nothing, suggesting people are using the mkt move to get closer to benchmark). That said, 1570 is clearly a barrier for the rally, so selling the upside beyond there looks obvious.  Hence the call spread.

Tactically I think the trade is to get another few days of time decay on the short position in Feb 1470 and 1475 puts before covering them, and then to sell the Mar28 1460 puts, which are around 15 points. I get paid 15 points for the 1460 puts, against paying 6.5  points for the 1540/1570 call spreads – ie both 40 points out of the money. So I can buy 100 call spreads against just 50 puts for zero cost. And the expiry ties in nicely to quarter end and Japanese year end – perfect for a window dressing rally… On top of that 1460 looks like a level where you ought to buy the market outright anyway, so being exercised on those puts is something I’d be comfortable with (given a Fed on perma-hold after today’s uptick in unemployment). In fact I can’t think of a better backdrop for stocks :
-       stable, if low, nominal GDP growth, so steady revenue growth
-       no cost pressure from wages or energy
-       a market that still seems underweight (no pullbacks to cover the underweight inherited from the fiscal cliff negotiations)
-       Fed on perma-boost at $85bn a month of QE
-       AAPL already deflated, so that risk is neutralised
-       Fiscal cliff deferred, if not properly solved

USD rates
            EDZ4                                    - long 75
            EDZ7                                    - short 125
            3em6 98.125p            - long 350

The EDZ4/EDZ7 steepener is insurance for the Fed changing their mind. If they’re wrong, and the labour market recovers sooner than they expect, then EDZ7 is mispriced by at least 100bps. And that’s before anyone’s unwound a single carry trade. At the same time, EDZ4 is near the top of its range, so I’ve sold out 40% of the long position and working orders to sell the remaining 60% in equal clips at 99.41/99.47/99.49. Look to buy back the 40% I’m underweight in EDZ4 at 99.28/99.21.

The blue Jun 81 puts are interesting. I have 350 of these at an average of 6.5bps. They ought to expire worthless, but the risk/return there is amazing. Time decay won’t be an issue for a month or two yet so nourgent issues there. The chart looks like it’s breaking down to 98.35 – but this contract traded 97.40 in Mar12. There’s a thought.

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