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its always "possible"....but you always have to ask "what created this opportunity?"
in the rates market, eurodollar futures curve (which is a series of fwd interest rates) develops kinks from time to time....usually when a large fund or bank takes a concentrated position larger than the mkt can absorb...and that pushes 1 contract away from the strip. You could argue that is the market pricing in a change in Fed expectations...and if the rest of the market does a shoulder shrug...then maybe the kink just stays for a while.
But sometimes a trader pushes a kink into a curve because they know something...and you'll never know if that's the case until later.
We see this often in the long end of the US treasury curve with the 20yr point...because there is not great liquidity out there.
lots of people make a career of trading eurodollar flies in the front end interest rates markets....but you gotta really know what you are doing.
Thanks for your help man. Quick question, off topic... but as a Market Maker, how would you value strips? I was told to find the value and make an algo but let's say the outright and spreads rarely trade and they're trade in 60 points wide... like how would you value this to make a Market? And this isn't US market... fyi
I mean midpoint is too risky especially when the value is skewed... have to incorporate safeties in case of sweeps... I'm so lost lol
the real key here is coming up with a model that calculates the "right" value...and that requires more than just historical contract price data....you must understand all the drivers of your market.
for natty, this is mostly driven by weather models...but also requires a detailed knowledge of the supply chain (imagine how a supply disruption will influence the strip...or how new supply from new wells....what if its temporary? so you must research and follow those fundamentals...so the day a fundamental input changes...you are on top of it).
For STIR futures, this means understanding the central bank expectations curve, the credit curve, bank funding levels, etc...its never easy...never just one thing. If it was easy, everybody would do it.
in addition to all of that...of course you want to have the historical contract data and analyze how the market moves to take advantage of small price arbs that only a market maker can.
I've thought of using the netchange from settlements but even still let's say the strips trade higher and the spreads don't move... clesrly the spreads are mispriced
Would you ever exploit the 2 10 30 flies... I mean that's a whole different monster
i know a guy who mostly just trades 5/10 curve flattener vs 3/30 curve steepener (and vice versa)....so yes....but its a hard slog
Are you trading your own money or at a prop firm?
Honestly man... I'm so burnt... I come in to work at 2am to trade the European market then I trade the entire U.S. session til 230 then unwind til 5
I used to do a lot of STIR flies, it's a profitable game if you can figure out how to capture the mean reversion. The key issues is controlling your transaction costs against the alpha that you are planning to capture.
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