Betting Against The U.S.

(Looking back - July 25, 2011)

"Investors: The $1 Billion Armageddon Trade Placed Against The United States

Jack Barnes: Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

The massive trade wasn’t placed in bonds themselves; it was placed in the futures market."

ETF News

This was a year ago. This kind of a trade just doesn't seem possible now, as the available contracts and open interest show that futures are looking at higher prices. You just can't buy put options for this strike price.

The options chain can be looked up via ino.com for anyone who doesn't trade futures. You don't need a margin account to back a trade in futures options. If anyone intends to make money on these futures, then they need merely buy the contract and then tender it later prior to expiry.

You would need billions in margin to buy those underlying treasuries, and then sell them within a few weeks' time or less. After taking delivery and selling before the margin call, paying down the margin and selling the treasuries you bought, you could make a percentage on a very large amount of money.

But with delta hedging strategies, you use algorithmic trading to buy options for the next expiry, which is for the June contract. So essentially this means that it was a bet on an anticipated equities rally. You use the money coming into mining stocks to roll this bet over indefinitely. That there's no money coming into GBN.V stocks poses a major problem for delta hedging strategies.

It could also mean that with a downgrade, these options which are probably trading for 1.5¢ a contract will rally very hard to the $30 level.

You can check up on strike prices and options contracts to get an idea.

Very likely the JP Morgan trade that failed was an interest rate bet that U.S. treasuries would decline in price and yields would rise. So even the biggest, most liquid traders in the commercial banking space are getting it wrong.

The failure of this trade against the U.S. meant also that gold miners were utterly trashed as the value of long-dated U.S. treasuries increased.

http://quotes.ino.com/options/?s=CBOT_ZB.M12.E