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Whale | Shorts
The Wall Street Skinny
March 07, 2025
This Week on The Floor
Equity markets in turmoil. Global bond markets selling off. And it’s not even the ides of March yet…😳
Whale in the Treasury futures market: Futures DV01 EXPLAINED
Answering your questions: how does a SHORT position work?
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Markets Recap / Deal News
Interviewing this week? Here’s some content for your conversation.
Earlier this week, we posted this video about the largest ever (!) trade in Treasury bond futures:
TLDR: it appears someone sold a giant block of 10 year Treasury bond futures (“TYs”) during London hours.
78,000 contracts equals approximately $5.1 million dollars for EACH BASIS POINT (0.01%) that interest rates move.
We don’t know whether this was an outright short position (betting on 10 year rates going higher) or a hedge for some other positioning, perhaps a portfolio of call options.
If it WAS an outright view, it’s been a killer trade.
Rates have sold off 15-20 bps since Wednesday morning. Why?
Germany announced a massive spending plan to support defense and infrastructure investments, causing bunds to sell off 30 basis points intraday — the largest single-day sell-off for bunds since the fall of the Berlin Wall.
Trump’s address to the nation sparked further concerns about the inflationary impact of tariffs.
And we’ve seen tremendous corporate bond issuance, led by Mars’ $26bn bond deal to fund its acquisition of Kellanova (although that particular deal was ~4.5x oversubscribed 😱).
Now, how did we convert 78,000 TY contracts into $5.1mm in risk? We got hundreds of responses on IG and TikTok from those of you who wanted to learn precisely how we calculate the DV01 of a futures contract.
So we made you a video! Check it out here ⬇️
Calculating the DV01 of a Treasury Futures Contract EXPLAINED
How Does a Short Position Work?
We got this question from several of our followers on Instagram. Given we already discussed the short TY trade, it only makes sense to zoom out and explain how shorts work in general!
First, we’ll walk through the basic principles. Then, identify some of the risks. And finally, we’ll talk about various ways to express the view.
Basic Principles
If I like an asset — a stock, a bond, a commodity, a currency, a piece of real estate, what have you — and I think its price is going to go up, I can go BUY it. In finance jargon, that’s initiating a “long” position.
But what if I have the opposite view? I think an asset like a stock is overvalued, in trouble, or is vulnerable to some big price shock.
I think its price is going to go down, and I want that exposure. What do I do?
If I am an investor who owns an index or who owns some shares of that stock, I can sell out of them or go underweight relative to the index.
But I can’t just sell shares of some stock I don’t own, can I?
Wrong. This is exactly what “short selling” is.
To express the view that the stock is going to go down in price and benefit directly if it does, you can borrow shares of that stock (say, through a prime broker at an Investment Bank). You pay some fee to borrow those shares over a given time period.
You then sell those shares that you do not own, but have borrowed, with the hopes that you can buy them back in the future at a lower price (called “covering”).
Sell high, buy low.
Risks
My goal is to money if the price goes down.
But my risk is massive. I can lose a theoretically INFINITE amount of money, because there is no upper limit on the price of a stock.
Think about it this way: when I buy a stock, the risk is actually finite: the price of the stock can go to zero, but no lower.
So I can lose all the money I invested (and if I borrowed money to do so I lose even more), but my losses are FINITE.
The price of a stock has a somewhat “lognormal distribution” — it’s not going to go negative.
Note: this is different from interest rate products, where rates can and do go negative.
Being short without a hedge, though? I can lose a theoretically infinite amount of money. And as Kristen recently quoted, “markets can stay irrational far longer than you can stay liquid”.
Expressions
Borrowing shares and selling them is one of the riskiest ways to express this view. There are other ways to take a short position WITHOUT unlimited downside.
One way is to buy puts: options where you have the right, but not the obligation, to sell something at a future date at a future price.
If you have the right to sell something at $100 one month from now, and its price drops to $90 by the time your option expires, you’ve made $10, less the cost of your option.
That is one way to express a short view with defined downside, where your losses are limited to your premium paid.
There are also ETFs that offer short exposure (or leveraged shorts, like the double short long bond fund TBT).
If you want a deep dive into shorts, our favorite show Industry does a great fictionalized account of the famous Gamestop short squeeze. Check out our breakdown here: