-40-
because it was probable that the credit spread put positions would
have suffered losses in the aggregate.35
Tandrill’s Positions at September 30, 1979
At the end of September, Tandrill was short 56 Treasury bill
futures, a position worth millions of dollars. Tandrill had
partially reduced the risk of this position by selling 144 put
spreads, each on $1 million worth of Treasury bill futures.
Although Tandrill received $78,000 in premiums from selling the
higher strike puts over the lower, it stood to lose $180,000 if
both ends of the spreads expired in the money, and thus could have
incurred an overall net loss of $102,000.
Despite this potential loss, Tandrill covered the short
futures in early October, while actually increasing the short put
exposure. Tandrill realized an $82,500 profit from covering its
short Decembers.
The trade also locked in an additional $100,000 to $125,000
profit on the new March-December Treasury bill futures spread. Mr.
Borst believed that Tandrill made a very bold and risky move,
switching from a very bearish position to a very bullish one.
Tandrill’s Positions at October 31, 1979
Tandrill was long December 1979 Treasury bill futures against
an equal number of the March 1980 Treasury bill futures. The long
35 Mr. Natenberg disagreed with this analysis. He opined
that if one enters a position as a true hedge, once the primary
asset has been disposed of, the hedge is no longer required.
According to Mr. Natenberg, a true hedger would liquidate the
hedge at the time of disposition of the primary asset.
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