Eurodollar butterfly relationships

Posted: February 7, 2010 in Eurodollars, Strategies

In the previous post, we spoke about the various CME exchange listed strategies.  In this post, I will focus specifically on the characteristics of exchange listed eurodollar butterflies.  Many traders and market makers tend to trade and hedge inventory into butterflies because of their inherent stability in volatile markets.  Butterflies are constructed by buying an expiration, selling 2 of the next expiration, and then buying 1 of the next sequential expiration.  They have a quality of being net outright position equal to zero, lower margin than holding outright positions alone, and are less risky in general (again there are some sticky broken butterflies in the agriculture markets) than holding outright positions alone.

First observation, the white butterflies are the most directional as they are tied to the most current market reaction to fed policy and also the most volatile in the term structure.

First, let’s examine the volatility of the eurodollar butterflies:

So from this you can conclude that the front eurodollar butterflies are most tied to short term economic events, changes in federal policy, and other events.  You may also conclude that these butterflies in the whites and reds would be the most directional (not mean reverting).

As can seen below, the white butterflies.  Notice the very directional nature and the associated spread (price ranges) of the white butterflies.

Next, we move on to the red butterflies.  Recall that from the previous post that the 4th White and 1st Red contracts are the most volatile points in the curve.  Notice the effect on the first red (H1) butterfly.

Moving on to the green flies, notice the stability and price ranges.

And moving further along the curve to the blues:

And moving slightly further to the gold butterflies.  Stable?

  1. dasdas says:

    nice blog

  2. […] Eurodollar butterfly relationships February 2010 1 comment 4 […]

  3. Siddharth Mishra says:

    Hi. Any idea if these BFLY packs have a last trading date?

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