-35-
1981 GNMA contracts and the simultaneous sale of 15 September 1981
GNMA contracts; and the purchase on each day of 15 September 1981
Treasury bond contracts and the simultaneous sale of 15 March 1981
Treasury bond contracts. These transactions taken as a whole have
the appearance, and effect, of incurring minimum market exposure to
risk of loss and no possibility of net gain (after transaction
costs) notwithstanding the fact that the transactions, viewed
separately, each had the possibility of making or losing thousands
of dollars per contract. This was accomplished by establishing
“straddles of straddles”.29
While Tandrill’s GNMA trades consisted of long March and short
September (a 6-month forward spread), the bond trades were the
opposite, short March and long September (a 6-month back spread).
Consequently, while either the GNMA straddle or bond straddle taken
29 For example, Tandrill’s bond trades of June 26 and 27,
1980, occurred as follows: In that period the price of March
GNMA’s dropped $1,062.50 per contract and the price of March
bonds dropped $1,250 per contract. At the same time the
March/September GNMA spread moved $93.75 per contract, and the
March/September bond spread moved $62.50 per contract. Finally,
the entire position taken as a whole moved the minimum possible
increment that day, $31.25 per contract.
On Oct. 28, 1980, Tandrill executed a straddle of a
straddle involving GNMA’s and bonds, buying 30 June GNMA’s and
simultaneously selling 30 March GNMA’s, and buying 30 June bonds
and simultaneously selling 30 September bonds. These
transactions resulted in recognition of a $327,030 loss on the
GNMA’s and a $368,280 loss on the bonds and still left Tandrill
with offsetting 3-month straddles, June/September GNMA’s vs.
June/March bonds. On Oct. 30, 1980, after recognizing a net loss
of $693,750 (plus commissions of $1,560), Tandrill still had
profits of $691,406.25 in its open GNMA/bond position, for a net
loss of $2,343.75 (or 2-1/2 points per contract). This loss is
primarily attributable to transaction costs.
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