Browse Carley Garner's Trading Education Books
Had it not been for the JP Morgan surprise conference call last night, this newsletter might have gone in a completely different direction. In fact, I think we likely could have witnessed the typical counter-trend Friday action that we are accustomed to seeing. Instead, Friday's trade resulted in another retest of the upper limits (just over 145 in the June 30-year bond and just over 130 in the 10-year note).
We are still relatively comfortable with the idea of a price reversal in Treasuries in the coming sessions but we can't ignore the fact that traders continue to press the highs. The longer prices linger "up here", the higher the probability of one more round of short squeezing (AKA running the buy stops above resistance). Accordingly, if you are looking to play the downside, be sure to leave room for error.
In mid March few believed Treasuries could rally at all, let alone to this magnitude. The current run has been the longest winning streak in government backed securities since 1998. We aren't going to say that we were absolutely certain prices would rise from 135 to 145 in the span of about two months, but we had been pointing toward positive seasonals and the possibility of prolonged short covering (there were too many bears).
Now that we are trading near 145 in the June 30-year, we've eliminated most of the weak shorts and it feels like the rally has "suckered" in what could be the late buyers. Unfortunately for them, that is exactly what needs to happen for the market to turn the corner...if all of the buyers are in and the sellers forced out, we will simply run out of bids.
Our models suggested resistance (and potential reversal areas) in bonds near 145'03 and the June bond failed to trade above it for long (the high of the day was 145'08). If we are right about a change of heart, the market could make its way back to the mid 142 level in the coming sessions. If we are wrong, the next resistance level will be 146'02 and then again near 146'20. The downside in Treasuries could see notes trading back to 132ish with resistance near 133'27.
From yesterday but still valid:
It has been a relatively wild week thus far, and it is only Wednesday! However, it feels like the markets have managed to work out most of the turmoil early in the week and we could be in store for a period of "risk on" trading. In addition, in yesterday's newsletter we pointed out resistance in the DX futures near 80.50, and today that seemed to hold. If so, this could be a key to a reversal in other financial markets such as Treasuries and equities.
Don't forget, this time of year is overall bullish for bond and notes so betting the farm on a complete collapse probably isn't a good idea. Instead, we believe the pullback will be rather modest in size and temporary in nature.
Judging by action in the option markets, it appears as though retail traders (the small guy, harshly known as the dumb money) are eager to be long 30-year bond calls. It was evident from the get go that moderately higher futures prices were translating into grossly overvalued call options (due to high demand for the instruments). Accordingly, this morning we were comfortable in recommending our clients sell the July bond 149 calls for about 30 ticks this morning. Some fills were reported at 30, but most took 29 and were satisfied. These exact options were trading under 10 ticks last Friday, so they have more than tripled in value in a matter of days and settled at 20 yesterday. Being nearly 5 handles out of the money in an already extended market with 45 days to expiration, it seemed like a high probability trade to us...and so far so good, at the time of this writing these call options were trading near 21. We hope to be able to buy them back in the next few days for a little less than half the premium collected.
* 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.
**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.
5-7 Clients were advised to sell the July 30-year bond 147 calls and 139 puts for about 60 ticks in premium (or $937.50).
5-9 Clients were advised to sell the July 30-year bond 149 call near 30 ticks (or $468.75).
5-10 It was recommended that clients buy back their 149 calls to lock in a quick profit of about $234.50 per contract before commissions and fees.
5-11 Clients that bought back the 149 calls yesterday were advised to resell the option today for 28/29 ticks.
In other markets....
4-2 Clients were advised to sell June soybean 1570 call options for 8.5 to 8.0 cents.
4-4 Clients were advised to sell corn strangles. Strikes and fills varied slightly (730/600 strangles for 14.5 cents, or 720/605 strangles for about 16.5 cents)
4-10 Clients were advised to buy back their 730 corn calls for about 3 cents to lock in a profit of about $250 before commission and fees.
4-18 Clients were advised to buy back their 1570 soybean calls for about 3 cents to lock in a profit of about $250 to $275 per contract before transaction costs.
4-19 Clients were advised to sell June Yen 127.5/118 strangles for about 72 ticks or $900 before transaction costs.
4-19 Clients were advised to adjust the remaining leg of the corn strangle by buying back their 605 puts and replacing the premium with June 640 calls and July 580 puts. The roll over netted a credit of about 2 cents. The 605 put sustained a loss of 14 cents but luckily gains on the short soybean call and corn call covered a majority of the pain. We are now hoping for volatility to decrease to provide an opportunity to work out of the trade.
4-24 Clients were advised to sell June soybean 1590 calls for about 8.75 cents or $437.50.
4-25 Clients with plenty of margin (and guts) were advised to add to their short bean call position by selling the June 1650 calls for 9 cents (this price didn't last long so some sold the 1630s for about the same price instead).
4-26 Clients that were able to get the 1650 calls off at 9 cents, were advised to buy them back near 3 cents to lock in a quick profit of just under $300 per contract before commissions.
4-26 Clients were advised to roll their short Yen puts higher to rebalance the delta of the short strangle. It was recommended to buy back the 118 puts for about 16 ticks to lock in a profit of about $262.50, and sell the 120 puts for about 37 ticks.
4-27 Clients were recommended to resell the 1650 calls for about 9 cents (again), those that missed it sold the 1640s for about 9.
4-30 Clients that were lucky enough to sell the 1650 calls on Friday for 9 cents were advised to buy them back today at 4 to lock in a profit of 5 cents ($250 per contract) in a matter of days.
4-30 Clients were advised to offset their Yen 120 puts near 15 ticks to lock in a profit of about $250 per contract before commissions.
5-1 Clients were advised to offset their corn strangles (both the 680 July puts and the June 640 calls) at a profit of about $300 to prepare (reduce risk) for the USDA report next week.
5-1 Clients that sold the June soybean 1640 calls for about 9 cents on Friday were advised to buy them back for 3.75 today to lock in a profit of $250 to $275 before commissions.
5-1 Clients were advised to sell June Yen 121 puts for 30 ticks to re-strangle the market (lower the delta of the trade).
5-3 Clients were advised to lock in a profit on thier short 1590 calls of about $200 to $225 to exit prior to payroll report and USDA.
5-7 Clients were advised to sell July crude oil strangles in an attempt to capture overnight volatility. We were able to get about $1.00 ($1,000) for the 83 puts and the 108 calls.
5-9 Clients were advised to roll their 12750/1210 June Yen strangles into June 12850/12250 strangles. Doing so locks in about $475 in profit on the originan trade (counting adjustments but not including transaction costs). The "new" strangle was sold for about 60 ticks or $750.
5-10 Clients were advised to sell July soybean strangles using the 1570 calls and the 1360 puts for about 16 cents in premium or $800.
(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)