Interest Rates recap:

The year 2024 was certainly an important year in the U.S. rates complex. From the start of the year when there were over 6 rate cuts priced in for all of 2024, to the middle of the year when it was priced at 1 or maybe 2, to the reality of the end of the year, market watchers have been changing their opinion on what the Federal Reserve would do. This was only part of the news affecting the long end of the Treasury curve, where persistent or sticky inflation and the concern over increasing fiscal deficits and elections also played a factor. For the year, I looked at ideas across the rates complex in order to find the best opportunities. 

February 20 report:

As I mentioned, early in the year there were expectations of multiple cuts throughout the year. I began the year by suggesting that perhaps not as many cuts would happen as the market was pricing in. I was able to use the CME SOFRWatch to look at what might happen in the futures markets if my view on rates were to transpire instead of what the market was pricing. I combined this with low readings on SOFR CVOL to find an idea that not only bet on higher rates but also volatility moving higher. With an eye toward the June FOMC meeting as the catalyst, I looked at selling a June 95.25 put and using the proceeds to buy 3 of the June 94.9375 puts. The breakeven for this idea was 94.7825 in futures. As rate cuts were priced out, futures did indeed move lower into expiration, with an ultimate settlement at 94.65 giving me a successful outcome in the first rates trade of the year. 

June 11 report:

Again, looking at the June FOMC as a catalyst and considering the implied volatility was quite high based on CVOL time series, I looked to sell a June 110 straddle into the catalyst. Knowing that many traders would not feel comfortable being short the upside wing, in the event the FOMC was more dovish than expected, I also bought 110.75 upside calls to hedge one half of the distribution. From the release through the expiration after the FOMC, futures stayed in a 109-08-110-30 range, well within the breakeven of the short straddle, generating another positive outcome. 

September 17 report:

In this report, I was focused on the labor market, part of the FOMC dual mandate. At this point, many in the market were concerned about a deteriorating labor picture that could lead the FOMC to be more aggressive in November and beyond. I suggested this could be overdone and looked at Fed Funds November 95.3125-95 1-by-2 put spread, betting that Fed Funds would stay above 4.6875% by the November FOMC. I was wrong and futures moved to 95.3665 for a breakeven rate of 4.635%. I was wrong on the move-in rates as it moved more than I thought. However, since I did the trade at zero cost, there was no loss to me. 

October 29 report:

In the final rates report of the year, I looked at a TY trade using the U.S. election as the catalyst. The market at this time was beginning to be very concerned about fiscal spending, regardless of which candidate would be successful in the election. There was a kink in the implied volatility term structure, and I was able to use the Event Volatility Calculator to show that the implied volatility for the election was over 20% vs. a normal level closer to 7%. I suggested that markets would get a lot of data in the week before the election that may impact rates markets more than the election itself, so traders should consider buying a November 1, 111 put, and selling a November 8, 110 put, with the elevated volatility. In a calendar spread or diagonal, there are many different potential outcomes, so I used the P&L simulation in QuikStrike to discuss how a trader could risk-manage the trade. One of those outcomes was futures trading lower before the November 1 expiration, which would benefit me since I owned the higher strike put by virtue of the lower volatility I paid. This is in fact what happened, and I suggested if it did, traders should close their positions for a gain before the election. It was a win for me, but if I had suggested simply covering enough of the futures to turn the November 8 position into a straddle instead, it could have been an even bigger winner, with implied volatility collapsing after the election. 

Given I was successful in 3 of the 4 ideas, with the other being no loss to me because it was done at zero cost, I have to be happy with how the ideas played out in rates this year. The variety of products, expirations and tools to analyze the data certainly played a large part in the success of the ideas this year. 

FX recap:

I always enjoy going to the FX market because this is the asset class where I started my career. In a day and age of globalization and trade frictions, there is no shortage of potential ideas in FX. This year, I looked at peso, pound and yen to showcase a variety of the potential products that traders have available. As you will see below, I thought I had a pretty good year in FX, too. 

March 5 report:

The Mexican peso had been one of the standout currencies of the last several months when I looked at it in March. I went through a variety of possible drivers of the recent performance as well as the expectation going forward, including interest rate differentials, oil prices, presidential polls and relative equity performance. When all was said and done, I came away with the sense that the peso was overvalued and had a risk of heading lower, and I wanted to be a little short volatility in the expression of my view. I went out to June expiration and sold a 5.80-6.00 call spread, using the proceeds to buy a 5.60 put. While the trade was done at zero cost, it was short vega to begin with. Futures were 5.74 when the trade was entered and by expiration, futures were 5.3750 leading to attractive gains on my 5.60 puts. A good early victory to start the year in FX. 

May 28 report:

I followed up the March report with more of a deep dive in May into the UK and U.S. equity markets. I looked at the index composition of each, showed how different sectors performed based on the economic data, and why this favored the UK. I also looked at relative M2 growth and relative fixed income performance to further paint the picture of a potential flow of funds into the UK. I focused on August expiration and sold a 1.255 put to buy a 1.2850 call for zero cost, trying to find the optimal bullish expression, taking advantage of favorable skew. Futures were 1.2700 at the time of trade with a breakeven of 1.2860. By expiration, futures were 1.2973 giving me another solid victory in FX. 

September 3 report:

In my last report for FX this year, I had to look at the yen market. Markets had just come off the early August de-risking, that may or may not have been the result of an unwind of yen carry trades, depending on who you ask. I went through the BOJ surprise move in August, the relative balance sheet growth of BOJ and FOMC and the interest rate differentials. I looked at the September FOMC as a potential catalyst for a move toward a stronger yen. I suggested taking advantage of skew, selling a September 72 Yen call and using the proceeds to buy 2 of the September 74 calls, giving traders leverage to a move higher in the Yen. The structure was done for zero cost. This was fortuitous because Yen futures moved lower the entire period after the report and into expiration. No loss because it was zero cost at least. 

For the year, I had two solid victories and one push, for an overall record that I am pretty happy about. Given I like to focus on macro drivers for opportunities, having success in a macro product like FX always feels good. 

Ags recap:

I covered the gamut in the Ags reports this year, beginning the year looking at Soybean Oil vs. Meal, staying within the beans to find the best bullish, counter-trend idea‌ and then focusing on a relative value trade of Corn vs. Soybeans. Suffice to say I feel I looked into the markets with good depth and learned a lot in the process. My results weren’t quite as compelling as in Rates or FX, but they weren’t horrible either. Let’s take a look. 

January 9 report:

Starting the year, in my first report for any product, I posited that 2024 would be an election year and that biofuels could be an important election topic. I showed the relative performance of Oil vs. Meal tracked the move in WTI crude markets pretty closely. Because of this close connection, there were more potential catalysts in Oil than Meal, and Oil implied volatility was low relative to Meal implied volatility. All of this pointed to buying calls in Soybean Oil, funded by selling calls in Soybean Meal. I suggested the optimal ratio was 8 Oil calls to 1 Meal call. The spread was at 1.00 on this ratio, at the low end of recent experiences. I liked the calls vs. calls instead of trading as a futures spread. In fact, I should have just used futures. The spread did in fact widen from 1.00 to 1.15, however, this happened more because Meal traded lower. Oil did trade higher, but only right to strike. Thus, both options expired out of the money. This had no explicit cost to me, but it did have an opportunity cost, as traders that put the spread on with futures would have had a nice gain. Thus, I have to consider this as an opportunity loss even if there was no actual loss. 

March 19 report:

Staying in the Soybean complex, I discussed the soybean crush. Ultimately, I was looking for the best way to get long Soybeans in some ways and compared and contrasted Soybeans, Soybean Oil and Soybean Meal to find the best expression. Traders were short everything in Soybeans, so I wanted to fund a contrarian position. With volumes high in all of the products, it was time to consider opportunities beyond just Soybeans, and I thought the best opportunity was in Soybean Meal. I chose to sell April 335-320 put spreads and use the proceeds to buy 2 of the 355 calls, giving me a levered bet on the upside of Soybean Meal. Once again, I had a good directional call, but I should have chosen a lower strike or simply bought futures as futures did trade higher, but the options expired just below my call strike. Another case of no explicit loss, but another opportunity loss. 

June 25 report:

For this report, I was focused on the USDA Acreage report at the end of June. This is a major catalyst, and I wanted to find ideas for either bulls or bears. Looking at the Event Volatility Calculator, implied volatility for the event was quite high, so I would have to find directional views that sold volatility too. I felt for traders that were bullish, the best trade was to buy Corn futures and lever this view with a 1-by-2 call spread over the top, giving leverage to the long futures between 475 and 490 strikes. For traders that were bearish, the best trade was to sell a Soybean 1150-1180 call spread and use the proceeds to buy 1100 puts. For traders happy to look at relative value, they could put on both spreads and play the ratio of Corn vs. Soybeans. Post the data coming out, both Corn and Soybeans traded lower. Corn traders lost money by virtue of being long futures. Soybean traders made money because they were below 1100 at the time of options expiration. If one either did the bearish trade or the relative value trade, they made money. If they only did the bullish trade, they lost. All in all, I look at it from a relative value standpoint and the trade made a little bit of money, so a small victory. 

Overall, it was a muted year in Ags in the first part of the year. In the second half of the year, I wrote the Excell with Ag Options piece again (not covered here) to focus on each monthly WASDE report. While there were small gains throughout the first half, since the first two ideas would have been better using futures than options, I still came away a little disappointed. However, it goes to show the importance of having not only a directional view but also a volatility view when using option strategies.

Metals recap:

I was very busy in Metals in 2024, with reports starting in January and ending in October. There were more reports across a wider time span in Metals than in any other product. It was a big year to be looking at the space as well, with the massive move in Gold, but also the expectation of Chinese stimulus and the impact it might have on the more cyclical base metals. Regardless of the catalyst, there was a lot to discuss in Metals this year.

January 23 report:

I started the year by looking at both Aluminum and Copper and comparing the performance of each to the economic leading indicators for the OECD countries. After all, these metals respond to global economic drivers. In looking through CME Group tools, one could see that traders were short both products. I found Copper most attractive because in the options market, one could see the skew ratio heading higher, which had predicted previous moves higher in both futures and implied volatility. The trade I implemented wanted to be long delta and long vega to capture both of these dynamics. I sold 1 of the March 385 calls and used the proceeds to buy two of the March 395 calls, giving me a breakeven of 410 for the trade. Futures did move higher, very close to expiration and eventually settled just above the breakeven. Thus, there were small gains but not enough for me to get excited, nor enough for me to suggest the options idea was particularly better than long futures and thus, I would call this a push overall. 

April 30 report:

In April, I took my first foray of the year into the Gold market. I looked at all of the potential drivers of Gold, from fiscal spending to inflation to real rates. With futures prices high and traders long, implied volatility high relative to its own history and skew even higher than that, I decided to take a contrarian bet and fade the move. I honed in on the May FOMC catalyst and used the daily options to implement my view with a May 8 expiration. I sold a 2415-2445 call spread, buying a 2345 put with the proceeds, as a defined reward-to-risk way to implement a contrarian view in a bullish product around a catalyst. Ultimately, futures went nowhere either in response to the catalyst or subsequent days. Since I spent no premium on a net basis, there was no loss to me, so I would again say it was a push. 

August 6 report:

Back to the Aluminum and Copper markets for the August report. Both products were trading very poorly at this point of the year on the back of the rapidly slowing Chinese economy combined with fading prospects of any stimulus to help. As traders were noticeably shorter Copper than Aluminum, and Aluminum was showing more signs of life, I had the idea to embark on a relative value trade, buying Aluminum calls and selling Copper calls against them to finance the trade. I chose September expiration and 2275 Aluminum calls vs. 419 Copper calls. Aluminum did in fact rally quite sharply, heading above 2400 at one point before settling at 2350. Copper also traded higher up to 422, but the breakeven on the short calls was 4.2375. Thus, I broke even on the short Copper calls and made a good deal of money on the long Copper calls that ended up 75 ticks in the money. I had a chance to trade out of the relative value trade at even bigger profits a couple weeks before expiration. Definitely a win for the good guys. 

October 1 report:

For the last report of the year, it was back to the Gold market, which was in the process of hitting new all-time highs. I went through all of the potential reasons for the Gold move, and most of the reasons actually pointed to lower Gold and not higher Gold. Options markets did not seem to be corroborating the move into uncharted territory, as implied volatility was little budged despite strong futures. I decided to use one of my very favorite trades, the split strike fly, that would benefit if the futures moved a little bit lower, and if they completely collapsed, would still hold onto some gains even if it moved past the maximum P&L. I prefer these types of butterflies to the more traditional symmetric fly or the broken wing fly that costs me money on a big move in my direction. I used the November expiration to go beyond the election and picked the 2625-2575-2550 put fly with a maximum gain at 2575 strike and breakeven at 2613.  Futures did in fact head lower by expiration and were at 2565, very close to the maximum P&L for the trade. A resounding win for me on the Metals trades. 

The first two trades for the year ended up being a push, which I think is one of the positive aspects of using options to express one’s views. If one is wrong on either timing or direction, they can still meaningfully reduce the risk they take and in this case, with premium neutral trades, I lost nothing on the first two. However, as I am always looking for asymmetric opportunities, when you are right, you want to make a lot of money, which I did on the last two ideas. Overall, it was a very good year for trading in the Metals.

Crypto recap:

The year 2024 might go down as one of the more important years for crypto and moving into the mainstream. Sure, the returns were very large this year, but perhaps more importantly than that, the changing regulation leading to ETFs for both bitcoin and ether in the front half of the year, combined with the expectation and hope of even more favorable regulation from a new U.S. administration, certainly has the crypto market abuzz unlike anything I have seen in years. 

April 16 report:

For the April report, my focus was on the upcoming bitcoin halving. While there had already been many positive catalysts such as the very positive ETF launch showing massive demand for bitcoin, I felt the reduction of supply still might be a positive catalyst. Throughout bitcoin’s history, each halving had led to higher prices in the following months. I decided to go long Bitcoin futures and use an April 26, 75,000-80,000 1-by-2 call spread to overlay on the futures long and give me leverage to a move higher. The idea was for traders who wanted to be long and to try and find inexpensive ways to lever their long position around the catalyst. The 1-by-2 call spread is perfect for this. In the end, futures were below the strikes of the spread, so both options expired worthless. Since I did the trade for a small positive premium, I made a little bit of money. If traders had stayed long on their futures given the positive drift post halvings, they would have done quite well. If anything, I chose an expiration that was perhaps a little too close to the event. However, it still allowed me to stay in a long and find a way to play the event – so, small victories. 

July 23 report:

This month, it was time for a relative value idea, looking at Ether vs. Bitcoin. Bitcoin had already had a number of catalysts, and now it was time for Ether to get its catalysts. It wasn’t the ether ETF but the Dencun upgrade that lowered gas fees. However, since the entire space had run up quite a bit, I wanted to fade crypto overall while being long the spread. I decided to buy Bitcoin 55,000 puts funded by selling Ether 2900 puts. Fact is, I was correct about the entire crypto space fading, but very wrong about Ether outperforming on the down move. In fact, Ether severely lagged on the move lower. Bitcoin fell from 65,000 to 57,000 so my puts never went in the money. Ether, however, fell from 3500 to 2500 so the 2900 puts were well in the money, causing a bit of a loser for me on this idea. 

October 15 report:

For this report, I went back to Bitcoin and looked at its recent movement. Was it moving more like gold, a safe haven asset impacted by geopolitical risk, fiscal spending worries and inflation? Or was it moving more like Nasdaq, a risky asset, benefitting from the expectation of lower rates? Ultimately, the U.S. election was the big catalyst to focus on, with Bitcoin expected to do very well in the event of a Trump victory, as one could tell from the co-movement in Bitcoin and Trump polling averages. I looked at options expiring shortly after the U.S. election, taking advantage of the weekly options. I sold a 62,000-55,000 put spread, using the money to buy a 70,000 call all for zero cost. Immediately after the election, futures traded up to 76,900 for a large win for me. It was good to end the year with a nice victory. 

A bit of a mixed bag in crypto this year, with big wins and losses as well as a small victory. The fact two of the three ideas were positive was good as was the fact I made more on the win and I gave back on the loss, so overall a good P&L even if everything didn’t go according to plan. 

Equity recap:

An amazing bull market in equities in 2024, though one that also presented trading opportunities as Q1 was very strong; Q2 was more sideways; Q3 had sharp moves higher and lower and Q4 resumed the strong bull market. With three reports for the year, I was able to find ideas in each of the market indices giving readers a bit of variety in both the underlying and the types of ideas.

February 6 report:

In the first report of the year, I looked below the surface to see how the sector rotation might be driving index performance. Namely, I looked at energy vs. technology performance and what this meant for the Nasdaq. In particular, I showed how energy vs. technology sector performance was driven by the CPI, as the former sector does well in times of higher inflation while the latter does poorly. I looked at forecasts for CPI and posited that a higher CPI would lead to rotation into energy and a move lower in the Nasdaq. I looked at February expiration after the February CPI and sold a 17,600-17,900 call spread using the money to buy a 17,000 put. CPI did in fact come in higher than expected, yet there was no rotation. The markets didn’t care and futures ground a bit higher into expiration, closing at 18,000 ensuring that I would take the maximum loss of 300 ticks. 

May 14 report:

In May, I decided to pivot into the Russell, looking at the June FOMC and Russell rebalance as catalysts that would highlight the underperformance of Russell vs. the other equity indices. I also showed how 2-year yields moving lower if the FOMC was more dovish than expected, could lead to higher forward P/E for Russell, taking index prices up. I went to the June expiration and sold a 1950 put and bought 3 of the 2250 call for zero cost. I wanted a levered way to play this catchup trade. In reality, futures traded lower over the course of the month but stayed above the 1950 strike. I had spent premium, however, as I wanted to lean long vega around these catalysts. Thus, I did lose premium on my levered long idea, but perhaps it was still better than long futures. 

August 20 report:

For the August report, I was looking at the August Democratic National Convention as a catalyst in the market. I anticipated volatility could be higher into and after this catalyst since there was enough uncertainty surrounding the outcome. In addition, traders would also be starting to think of the impact of the September FOMC over this period, too. I chose to buy an August 5375 straddle in S&P 500, looking at it as a breakeven play or as a gamma scalping play, depending on the trader’s interest and aptitude. If traders bought it was a breakeven play, they made money, as futures settled above the higher breakeven. If however, it was bought with the idea that a trader could gamma scalp and make money from higher realized volatility or implied volatility moving higher, it did not work, as realized and implied volatility both collapsed following the DNC with summer doldrums setting in. I would call this a push overall. 

November 26 report:

Time to go back to the Russell 2000 for my last report of the year. I looked at the strongly positive seasonality in equities overall, but Russell in particular. I discussed how the perception of the election and the FOMC were positive tailwinds. Finally, I looked at improving small business confidence and what that means for the Russell. I chose a January split strike butterfly, back to my favorite idea. As the report came out at the end of November, and it’s only a week into it, it is too early to say if the idea is successful or not. All of the drivers for the trade are still in place, though. 

I have to admit, this wasn’t a particularly good year for my equity ideas. I had one maximum loss counter-trend idea, and a few other ideas that have somewhat fizzled or not yet played out. It is always difficult to suggest something other than buy and hold in a strong bull market, though it can be worth it to try. My goal for 2025 is to improve on these outcomes for the equity traders.

Energy recap:

I am calling this an energy recap, but in reality, all of my ideas this year were in WTI crude. For next year, I have to do a better job of looking further afield for ideas. That said, even for focusing only on WTI, I had more winners than losers this year, so it was still a good result. 

April 2 report:

I went deep for the April 2 report, digging into the fundamental drivers of oil, which for me, all pointed to higher oil. I then looked at the behavioral or supply and demand drivers in the futures and options market and found that there were really no particularly strong views being expressed by futures or options traders. Finally, I looked for a potential catalyst, and saw the technical Golden Cross, the 50-day moving average breaking above the 200-day moving average, as the catalyst to take Crude futures higher. I wanted to use the new weekly options on WTI and looked at those expiring on April 16. I chose an idea that approximated a “digital” where I bought the 83.50-83.75 call spread. Looking at the pricing, the market was only giving a 28% chance of finishing above 83.75, which I felt was too low given the backdrop above. In the end, futures did rally and closed well above the 83.75 level, ensuring I made the maximum on the trade that I could. 

July 9 report:

In the middle of summer, I looked at the weather, in particular the hurricane season, which was beginning earlier than normal and expected to be worse than average. Was this potential for supply disruption the catalyst for higher prices? Or had traders already priced this potential? I decided on the latter and chose to fade the move, more so in implied volatility than direction. CVOL showed us that volatility was much higher than normal, and so I chose an iron butterfly, with a short-dated expiration later in the month. I used the 81-82.5-84 iron butterfly and futures were at 82 at expiration, being very close to the maximum payoff for the trade. Two ideas, and two max or close-to-max payoffs. 

November 12 report:

Riding high in my oil trades, it was time to look at the U.S. election and drill, baby drill. What does this really mean, though? Is it negative for oil prices? For oil stocks? Or is it positive for oil regulations and oil profits? I suggested that in spite of all of the negative perception, a Trump victory might in fact prove to be positive for oil. I waited to get the election results and saw the oil price initially trade lower but then turn higher. This gave me confidence that perhaps the market was coming around to my view. With the next catalyst on the horizon being the OPEC+ meeting on December 1, I looked for a Monday, December 2, 70.5-74-76 split strike fly (there it is again), looking for positive momentum from a Trump victory and OPEC+ set-up. In the end, Oil futures traded lower from the days after the U.S. election all the way through expiration, so I lost the premium I invested in the butterfly. While I would have lost more if I had bought futures instead of this idea, it's still a small loss for the good guys. 

In the end, I had two big wins and one small loss, so I am pretty happy with how things turned out in oil. It was not only a good batting average, but a good slugging percentage. While I will look to diversify my products next year, at least I did well with this focus. 

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