Theodore A. Andros and Joan B. Andros - Page 35

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          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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