Ruh-roh Raggy, or I Love It When a Plan Comes Together

Price action since last Friday's stonking payroll figure has been rather telling, wouldn't you say?  Two trades that have worked a treat in recent months- long Spooz and long USD/JPY- have come under the first threat of any kind since that gut-wrenching roller coaster ride in mid-October.

Price action in the latter has been particularly troubling, as the first two trading days of the week saw a breathtaking 4-figure swoon before recovering, albeit modestly.  Having lived through, as the Prince of Frankfurt might say, the slings and arrows of outrageous markets for most of the year only to end on an apparent high, tolerance for further drawdowns must be miniscule indeed.

Macro Man noted last month that some of the recent price action in  Japan reminded him of 2005-06.   Punters of a certain vintage may recall that after a solid rally in 2005, USD/JPY cracked back brutally in December that year before eventually resuming its upward trajectory in spring 2006.

 As noted risk manager Scooby-doo might say, "Ruh-roh, Raggy!"

On a somewhat happier note, US rates- particularly your author's favored EDZ5 contract- have behaved rather more as expected in the wake of the payroll number.  Macro Man has not written about many specific trades during his renewed tenure at the helm of the good ship MM, but he has noted 3 specific opportunities with respect to EDZ5:

* Selling the EDM5/Z5/M6 futures fly at -8

* Buying the EDZ5 99.00/99.12/99.25 call ladder for a 3 tick credit

* Buying the EDZ5 99.25/12/00 put fl for 3

Of these, the first has drifted slightly against him after an initial flurry in his favour, currently sitting at a 2.5 tick loss.

The option structures both have optimal payouts with the future at 99.125; after flailing about in a range all year, at the time of writing we're at 99.09, a mere 3.5 ticks from the haven of max profits.

Unsurprisingly, the option strategies have performed very well indeed; the call ladder's currently valued at 8, with the fly at 6.5.  Thus far, Macro Man's view that a strong payroll would be more accurately reflected in rates rather than FX thanks to positioning has proved correct.

As noted punter Hannibal Smith might say, "I love it when a plan comes together!"

Discretion is, of course, the better part of valour, and while the last few months have been a fun (ahem) ride, we're now at the stage where noise trumps signal in determining price action.   Your author has therefore started cashing out this week, and anticipates finishing the job before the options expire on Friday afternoon.

Call it a triumph of proper macro; the call ladders sat on his book for 8 months untouched, and have ended up delivering a handsome reward.  It made a welcome change from "OMG have you seen the last 30 pips?!?!?!" that characterizes so much of today's 5-minute macro world.