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Want Some Carry? Simple: Sell Main

08 July 2014 by HCM

Over the last few trading sessions, decompression trades have been back in fashion. Investors have been using the most liquid instruments to implement these strategies. Index option relative value trades have been set up to September and December expiries. Investors bought payers on iTraxx Crossover and iTraxx Financial Senior, while selling payers on iTraxx Main to finance them. The strikes used were 25 to 30% out of the money. The more adventurous have used indices directly. In each case the end result was the same: buying pressure on Crossover and Financials protection and selling pressure on Main protection. These strategies should work in a weak scenario, but no one wants to bet against central banks, and most do not anticipate potential corrections to be long lasting. Hence liquidity will be key when the time come to take profit, and the market has not seen positions built on single names to the same extent. That translated into different index basis to theoretical behaviours. While the basis was stable for Main, it has opened up for Crossover and Financial indices since early July.