A rip your face off rally in Treasury futures?

ES ZB NQ TF $es_f $zb_f $zn_f
  

Plenty of (part time) jobs


Government stats revealed that a disappointing 162,000 new jobs were added to the U.S. economy in the month of July.  However, what is more disappointing is the nature of the new jobs created.  According to the stats available to us, of the 953,000 jobs created this year, only 23% of them were full time.  Of course, taking this a step further we concur that 731,000 of the 953,000 new jobs are part time! We are moving in the right direction overall but there is certainly reason to be concerned over the nature of the job growth. 

The unemployment rate, which is flawed in that it doesn't account for those who have given up looking for work, ticked lower to 7.4%.  On the surface, this is an optimistic reading but any trader will tell you that each tick lower in the employment rate is a tick closer to Fed tapering.  Eventually, the equity markets might not take this very well. 

Interest Rate Futures Price Chart

The lows could be in for Treasuries

It is nearly impossible to turn on a business news station or pick up the financial section of the newspaper without being exposed to bearish Treasury security editorials.  The talking heads are clearly leaning toward the cyclical bear market in Treasuries that finally forces interest rates back up to more historically normal levels. However, we see at least three significant factors that could trigger the opposite. 

For starters, seasonal tendencies call for higher Treasuries in the coming months. Second, the Fed is still buying interest rates securities at an unprecedented rate. Lastly, the equity market has looked brilliant in recent weeks but it is on fundamentally shaky ground.  It might not take much to knock the stock market bull off its high horse; if so, Treasuries will benefit from a flight to safety. 

There are a lot of short speculators with buy stops lining the upside.  If you don't want to be long, don't be short!

Treasury Market Ideas

**Consensus:** We think the lows could be in.  A break above 134'08 could trigger a massive short squeeze!

**Support:** ZB: 131'27 and 130'29 ZN: 126'08 (minor),124'31 and 123'30

**Resistance:** ZB: 134'08, 136'21 and 138'07  ZN: 127'21 and 128'18

Position Trading Recommendations

*There is unlimited risk in option selling


May 10: Sell July ZB 140 puts for about 26 ticks ($390 per option). 

June 3: We were early on the first go around, but still like being short bond puts.  Clients who were flat were advised to sell the August 134 or 135 puts for about 29 and 35, respectively.  Some clients added to their July puts with these August puts.

June 5 - We rolled the July 140 puts into August 138 puts for even money to prepare (lower risk exposure) for the employment report.

June 24 - Roll 138 calls into a September 128/139 strangle and an August 130/138 strangle.  Roll 135 and 134 puts into a 2 by 1 lopsided strangle (sell 2 August 130 puts and 1 August 138 call). 

June 27 - Lock in profits on August 130 puts and September 128 puts; simultaneously sell August 133 puts and September 131 puts to bring the trade back to delta neutral.

July 5 - Lock in a profit on the August 138 calls and roll the August 133 puts into September 129/138 strangles for near even money.

July 17 - Buy back the September 129 puts to lock in profit of about 40 ticks (or $625) per contract before transaction costs. 

July 18 - Buy back the September 140 calls near 13 ticks to lock in a profit of about 30 ticks per contract before commissions and fees (equivalent to about $500 depending on your fill prices). 

July 18 - Sell the September 131 puts for about 25 ticks to re-strangle the market.

July 31 - Buy back the September 138 calls near 10 ticks to lock in a profit of about $300 per contract before transaction fees (depending on fills).

August stats are weak

In the early 1900s, the month of August was the best performer for stocks simply because our agricultural economy was flooded with money going into harvest.  However, now that the U.S. economy is less dependent on farming, August is actually the worst performer for the Dow, S&P 500, and NASDAQ in post 1987 trade.  Further, post-presidential election year Augusts ranks the S&P and NASDAQ 11th out of 12 months and the Dow 12 of 12. 

We'll admit this rally has extended further than we had expected but we aren't giving up on the idea of a large correction.  The charts, the stats, and the overly bullish sentiment are all red flags waving.  However, the Fed and QE are putting up a good fight. 

If you are playing this market as a bear, be sure to give it some room to breathe.  A possible short squeeze to the 1713ish level is still in play but if seen, this would likely be a good level to get more aggressive.  

E-mini S&P futures market price chart

Stock Index Futures Market Ideas

**Consensus:** We like the idea of being bearish on sharp rallies, it feels like this could be a last hurrah rally into the employment report.  We can't rule out a quick probe to 1713ish, but this might be a good place for bears to get aggressive.

**Support:** 1675, 1644 and 1607

**Resistance:** 1713, 1723 and 1728

Position Trading Ideas

July 11 - Sell August ES 1700 call for about $10.00.

August 1 - Roll the August 1700 into a September 1725 call for about even money.

Day Trading Ideas

**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**

Buy Levels: Let's see what Monday looks like.

Sell Levels: Let's see what Monday looks like.


In other commodity markets....

June 6 - Sell August Euro 137 calls for about 38 ticks or $475.  These options have nearly quadrupled in value from last week, and we suspect they stand to lose value nearly as quickly if the Euro rally falls short. 

June 20 - Sell August Euro 127 put for about 33 to strangle the market (compliment the short 137 call).

June 24 - Sell September 85/101 crude oil strangle for about $1.60, or $1,600.

June 27 - Buy back the 137 Euro call near 10 ticks to lock in a profit of anywhere from $330 to $350 depending on fill price (before commission and fees). 

July 1 - Buy back the September 85 put to lock in a profit of anywhere from 60 to 65 cents (depending on fills) before commission and fees.  We'll hold the short 101 call for now and will consider re-selling puts to re-balance in the coming days.

July 5 - Roll 101 crude oil calls into September 109/93 strangles and October 110/89 strangles.  This slows the trade down and spreads the risk to both sides of the market at distant prices.

July 11 - Sell the Euro 133.50 call for a little over 30 ticks to re-strangle the market (goes with the short 127 put already held).

July 16 - Buy back September crude 93 puts (some have 92s and 93s) to lock in profit of anywhere from $400 to $650 depending on strike price and fills before transaction costs.

July 17 - Buy back August Euro 127 put near 10 ticks to lock in about 22 to 25 ticks in profit, or $275 to $312.5 per contract before transaction costs.

July 19 - Sell the August Euro 129 put for about 29 ticks to re-strangle the market.

July 24 - Buy back August Euro 129 put to lock in a quick profit of about 18 to 20 ticks per contract before transaction costs ($225 to $250).

July 24 - Sell September crude oil 99 put for about 58 cents or $580 to re-strangle the oil market.

July 25 - Roll October crude puts into 94 puts (buy back existing put and sell the 94).  Depending on exact strike and fill prices, most clients were locking in anywhere from $400 to $600 per contract before transaction costs.  This moves re-balances the strangle to make it neutral. 

July 25 - Exit Euro 133.50 call near break-even (or a small loss for some). We've had a good run in the Euro, if you had followed all adjustment recommendations the total profit would be near $900 per contract before transaction costs. It isn't worth pressing our luck any further. 

July 26 - We like the idea of nibbling on bullish positions in corn via either long mini futures (near 495) or long September corn 520 calls for about 5 cents.  Both are low risk ways to play a possible 20 to 30 cent recovery in prices.

July 30 - The seasonal low in natural gas is looming, we like the idea of buying a mini futures contract near 3.45.

July 30 - Buy back all September crude oil calls. If you are holding the $111s your profit should be somewhere between $450 to $500 before transaction costs, if you have the $110s it should be somewhere between $550 and $600 before transaction costs, if you have the 109s it should be somewhere between $500 and $550 before transaction costs.

July 31 - Buy back September crude oil 99 puts near-break even (they were put on to hedge our short calls and are no longer needed).

(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)


DeCarley Trading
Twitter:@carleygarner
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http://www.decarleytrading.com
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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. 

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

 

**There is substantial risk of loss in trading futures and options.**

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