Bond volatility declines, will it last?
Treasuries spend the last two sessions of the week attempting to digest the erratic trade witnessed in the previous several weeks. I can't speak for everyone, but I welcomed the day's relatively peaceful trade and look forward to a weekend away from the markets.
Many traders noted that the lack of consistent volume is exaggerating price swings. However, all in all it is likely that the market won't make any dramatic moves until after the FOMC meeting next week. The Fed isn't expected to take action, but that doesn't mean that the market won't react to any accompanying commentary.
From a technical point of view, the market's immediate direction is highly uncertain. We see critical support near 112 in the long bond and resistance near 118. From a fundamental standpoint, we think that seasonal tendencies will begin playing a bigger factor. Given the light summer volume, which is often the case with summer bond trade, and an overly bearish speculative stance taken by traders it seems as though the path of least resistance will be higher in the intermediate term. That said, we can't rule out a test of 112 support or maybe even a retest of the recent lows (if equities make another attempt at the rally) before the market gets more footing.
At current levels, we recommend that traders remain virtually flat. As outlined below, we are holding a short August T-bond 110/123 strangle. If you are trading the note, we see support at 112'17 at which time we begin to like the long side and resistance near 115'11 and again at 117'20.
Luckily, none of our clients were involved in the 5-year note trade recommended below. If you did, I hope that you bought the insurance (114 put) recommended in this newsletter on the 4th of June. If not, and you were able to ride things out you would be sitting with an equivalent loss at this point. We still feel like a break of 114'02 could lead to a rally to the 116 area. If you have nerve (and you bought the insurance) you may want to let this one ride for now.
**Seasonality is already be factored into current prices, any references to such does not indicate future market action.
Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.
May 21 - Our clients were recommended to sell the July bond 112 puts for 25, fills ranged from 25 to 23. This option traded at just 10 ticks early in the day but an explosion in volatility allowed us to sell the option for a considerate amount of premium. The premise of the trade is to profit from declining volatility and or positive bond movement. The strike price is over 7 handles out of the money to give the position a considerable amount of room for error but of course the risk is unlimited below 112.
May 27 - We recommended that our clients sell the July bond 109 puts for 25 or better, some fills were reported near 30.
• May 28 - For those holding both the 112's and the 109's we lowered the delta of the trade by selling the July 123 calls for 30 and buying the 110 puts for 56. If we detect stability, we will salvage what we can for the long put and hold the strangle.
• May 29 - we sold the long 110 puts this morning for 30 and are holding the lopsided strangle looking for a decrease in volatility and accelerated premium erosion.
• June 5 - We bought back the 123 calls for 5 ticks to take a profit on that leg
• June 8 - We sold the July 119 calls for about 30 and the 118's for about 32 to strangle the market (AKA stop the bleeding)
• June 10 - We rolled the July 10 puts from the 112 puts to widen the strangle, we gave up about 41 ticks in premium to do it.
• June 12 - We recommended that our clients buy back the 109 puts for 8 ticks.
• June 15 - We recommended that our clients (with this version of the spread) buy back the 110 puts for 8 ticks.
Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.
May 26 - Buy the June 5-year note at 116'05 or better ( you should have rolled this into the September contract, which would be equivalent to an entry near 115'06)
• May 29 - Look to liquidate this trade near 115'29
• June 4 - We recommended readers with this position to purchase a 114 put for insurance, hopefully if you have this trade on you were able to do so. Doing this would limit the risk on the trade to approximately $1,500 before commissions and fees.
Eurodollar Futures Trading Recommendations
**There is unlimited risk in trading futures.
Flat
Treasuries spend the last two sessions of the week attempting to digest the erratic trade witnessed in the previous several weeks. I can't speak for everyone, but I welcomed the day's relatively peaceful trade and look forward to a weekend away from the markets.
Many traders noted that the lack of consistent volume is exaggerating price swings. However, all in all it is likely that the market won't make any dramatic moves until after the FOMC meeting next week. The Fed isn't expected to take action, but that doesn't mean that the market won't react to any accompanying commentary.
From a technical point of view, the market's immediate direction is highly uncertain. We see critical support near 112 in the long bond and resistance near 118. From a fundamental standpoint, we think that seasonal tendencies will begin playing a bigger factor. Given the light summer volume, which is often the case with summer bond trade, and an overly bearish speculative stance taken by traders it seems as though the path of least resistance will be higher in the intermediate term. That said, we can't rule out a test of 112 support or maybe even a retest of the recent lows (if equities make another attempt at the rally) before the market gets more footing.
At current levels, we recommend that traders remain virtually flat. As outlined below, we are holding a short August T-bond 110/123 strangle. If you are trading the note, we see support at 112'17 at which time we begin to like the long side and resistance near 115'11 and again at 117'20.
Luckily, none of our clients were involved in the 5-year note trade recommended below. If you did, I hope that you bought the insurance (114 put) recommended in this newsletter on the 4th of June. If not, and you were able to ride things out you would be sitting with an equivalent loss at this point. We still feel like a break of 114'02 could lead to a rally to the 116 area. If you have nerve (and you bought the insurance) you may want to let this one ride for now.
**Seasonality is already be factored into current prices, any references to such does not indicate future market action.
Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.
May 21 - Our clients were recommended to sell the July bond 112 puts for 25, fills ranged from 25 to 23. This option traded at just 10 ticks early in the day but an explosion in volatility allowed us to sell the option for a considerate amount of premium. The premise of the trade is to profit from declining volatility and or positive bond movement. The strike price is over 7 handles out of the money to give the position a considerable amount of room for error but of course the risk is unlimited below 112.
May 27 - We recommended that our clients sell the July bond 109 puts for 25 or better, some fills were reported near 30.
• May 28 - For those holding both the 112's and the 109's we lowered the delta of the trade by selling the July 123 calls for 30 and buying the 110 puts for 56. If we detect stability, we will salvage what we can for the long put and hold the strangle.
• May 29 - we sold the long 110 puts this morning for 30 and are holding the lopsided strangle looking for a decrease in volatility and accelerated premium erosion.
• June 5 - We bought back the 123 calls for 5 ticks to take a profit on that leg
• June 8 - We sold the July 119 calls for about 30 and the 118's for about 32 to strangle the market (AKA stop the bleeding)
• June 10 - We rolled the July 10 puts from the 112 puts to widen the strangle, we gave up about 41 ticks in premium to do it.
• June 12 - We recommended that our clients buy back the 109 puts for 8 ticks.
• June 15 - We recommended that our clients (with this version of the spread) buy back the 110 puts for 8 ticks.
Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.
May 26 - Buy the June 5-year note at 116'05 or better ( you should have rolled this into the September contract, which would be equivalent to an entry near 115'06)
• May 29 - Look to liquidate this trade near 115'29
• June 4 - We recommended readers with this position to purchase a 114 put for insurance, hopefully if you have this trade on you were able to do so. Doing this would limit the risk on the trade to approximately $1,500 before commissions and fees.
Eurodollar Futures Trading Recommendations
**There is unlimited risk in trading futures.
Flat
