We hope our viewers find our shows entertaining and laugh at our humor but we know what draws them to tastylive is the kind of information they won’t hear anywhere else. They can go to the other guys for the same old thing but they come to tastylive and keep on coming back for out-of-the-box thinking, studies based on hard data, usable information and an approach to trading they just won’t hear elsewhere. This segment is a great example. Our Futures guy, Pete Mulmat, joins the guys to discuss a Pairs Trade you’d probably never find elsewhere or on your own. Would you believe we have a trade idea for you to consider that pairs the S&P 500 with the Japanese Yen?
The Japanese Yen (/6J) has exhibited a high negative correlation to the S&P 500 (SPX) over the last few years. This has not been true lately. One of the biggest moves in the foreign currency trade (FX) this year has been the rally in the Yen. The Bank of Japan has engaged in quantitative easing and their 10-Year Bonds have a negative yield. The spread between the US 2-Year Notes and the Japanese 2-Year has widened out over the last 3 months to a yearly high of 109 basis points. The correlation between the Yen and the S&P has moved to almost zero while a year ago it hit -0.90 at one point.
Yen Futures and S&P Futures (/ES) have similar notional values but different Implied Volatility (IV). Pete saw this as an opportunity to add a Theta (time decay) component by using Futures Options in place of the /ES. A table provided all the information plus the trade idea of selling 1 December Yen Future and selling 2 November /ES Calls with a Delta close to 0.40. The table included the margin for each side of the Pairs Trade and the total Buying Power Reduction (BPR). Tom and Tony placed the trade at the end of the show. They checked it at the beginning of the Market Measures segment and since they had a nice quick profit exited the trade then.
For more information on the Japanese Yen and The S&P 500 see:
Closing The Gap - Futures Edition from April 29, 2016: "Japan vs. the U.S. Where's the opportunity?"
Closing The Gap - Futures Edition from September 23, 2016: "Sterling / Yen: Talk about Extremes?"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff Tony Battista and Pete Mulmat for a Pairs Trade idea of the /ES and Japanese Yen that is an example of why tastylive is different and see the guys take their profits on today's Market Measures.
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