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Treasury futures move higher into options expiration

January 21st, 2011
Treasury futures move higher into options expiration
Bond and note futures tumbled sharply on Thursday on what seemed like could have easily been a highly bullish day.  With stocks falling from Wednesday highs and commodities of all types suffering liquidation, many felt a logical place for money to move would be Treasuries.  However, despite the Fed buying heavily in the space, investors and speculators have thrown in the towel on the Treasury bull that has been running for so long. 
We admit that the multi year highs in the complex are likely in, and the path of least resistance for interest rates will be higher in the long-run...but that doesn't mean Treasuries can't go up in the near-term. 
Trading and investing is difficult; with so many on the bond bear bandwagon we have to wonder if it is time for a reality check.  Additionally, COT data suggests small specs are net short and they tend to be quick to cover once the going gets rough. 
Volatility has been painfully low as instruments across the curve have been consolidating in a relatively light range...and quiet markets never last long.  Our best guess is that we will see some type of flush of the sell stops and the last of the die-hard Treasury bond bulls, followed by a large short covering rally.  If we are right, 30-year bond bulls might get the chance to "go long" with futures, short puts, long calls or a combination near 117'20ish in the coming days. 
If we are wrong about the Treasury flush, the market could grind higher as long as the 30-year bond holds support near 119. 
* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.  Charts provided by Track 'n Trade, Gecko software.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
Treasury Bond and Note Option and Futures Trading Recommendations
**There is unlimited risk in naked option selling.
November 15- Clients were recommended to purchase a 5-year note futures near 119'19ish and purchase a 119'5 put for about 49.  This trade enables traders to hold a long futures position for 40 days with risk limited to about $850 plus commissions (more or less depending on fill prices).  This prevents traders from being stopped out prematurely and provides unlimited profit potential.
December 9 - Those participating in the 5-year note trade were advised (assuming they had the margin available and were comfortable with the risk) to exit the long put which was acting as insurance.  The approximate profit on the put was $1,000 before commissions but this leaves a naked (unlimited risk) long futures and a sizable paper loss to overcome.  The move makes it "easier" to recoup should the market decide to turn around. 
Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
Local : 702-947-0701

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.
There is substantial risk of loss in trading futures and options.
Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.