-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.Page: Previous 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Next
Last modified: May 25, 2011