Trading Update & Interview with R. Brennan
Volatility Is All Around Us
My philosophy is that all foreigners are out to screw us and it’s our job to screw them first. -- John B. Connolly, U.S. Secretary of the Treasury (1971-1972)
The world as we know it seems to have stopped working. “These are unprecedented times,” is what we say. “Where are the good news,” is what we ask. And, as ever, there are no clear answers.
We wish it were different, and we wish we could change it. However, the reality is that we need to face the facts and work with them. Traders know that the markets are always noisy and even chaotic at times.
We’d like to share an update on how we view the world through our trading lens. Our aim is to protect our core capital and make money by following a rules-based trading process in combination with opportunistic long volatility positions.
Although the current state of world affairs isn’t pleasing, we’re 100% focused on executing this trading process.
Should you wish to learn more about systematic trend following and why outlier price moves are all that matter, listen to my interview with Richard Brennan on Real Vision.
Here’s a quick summary of what’s going on inside our portfolio.
The U.S. dollar is a wrecking ball during current times, and it’s moving higher. The Japanese yen continues to trade weak, the British pound may soon reach parity, and the euro seems lost under $1. The BoJ, the BoE, and the ECB are trapped. I think the Fed is trapped, too. We’re long the U.S. dollar vs. virtually everything else these days. The below chart shows that the yen (orange line) has lost more than 20% vs. the U.S. dollar YTD.
We’re either short equity index futures or out of the position. The trends are less clear (more volatile) than in the currencies and we got kicked out of a few shorts in recent weeks. But as you can see with your bare eye, we have no business being long any of these markets. The below image shows continuation charts for front-month S&P futures, HSCEI futures, and Eurostoxx futures.
One exception are Dec 23 Eurostoxx 50 dividend futures. It’s the only equity-related long positions we hold in the portfolio. We opened the position in June and the P&L since then is essentially flat.
We’re short interest rate and bond futures. The following chart shows 10-year Bund, U.S. Treasuries, and Italian BTP futures. Following the reversal during the summer, the downtrend has since continued and seems to have become even stronger.
We’re short a lot of interest and bond markets and it’s a big notional position in our portfolio that shows substantial open trade equity (OTE). Last week we used some of that OTE to initiate long call positions on U.S. and German bond and rate futures. The size is a small fraction of our notional short position (our net delta remains very short). However, should bonds turn around, these calls should cushion some of the reversal loss, and depending on if and when it happens, the embedded convexity in these calls can get us onto the correct side a new trend quickly.
Next up: commodities. The latest long addition to our book is a long Dec 22 milling wheat position (opened last Thursday).
We got stopped out natural gas, RBOB, and heating oil a while ago but continue to hold a long position in Dec 22 WTI crude oil futures (which got very close to our stop). The aggregative delta of that position is, in part, replaced by OTM call options on far-dated WTI expiries (readers of our publications will remember that we initiated these positions a long time ago already).
Our portfolio is long corn, short soybeans, long soybean meal, short sugar, short canola, long orange juice… in short, all over the place. All of these positions are appropriately size, not too big and not too small, and all have a stop-loss and exit attached to them.
Last but not least: spread positions. Our systematic spread trading is down YTD, mostly due to the massive moves in the energies. We’re now short calendar spreads in grains (which has made money), have a long cotton spread position (which is losing money and may soon have to go), and long time spread in far-dated WTI crude oil, as well as a tiny position in long Henry Hub vs. TTF.
We hope this gives some perspective and is helpful for your own trading. The most important thing is to stay in the game and for your portfolio to survive whatever these crazy markets throw at it in terms of price action.
#happytrading
Your M&Ms from Twoquants
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