May 29th, 2009

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First they sour, then they soar!

It has been an eventful week in bond land and traders were more than ready for the weekend.  After several panic trading sessions in interest rates, Treasuries firmed up nicely to end the week.  The buying was likely a combination of short covering as traders squared their positions for the week, a realization that the market had gotten ahead of itself and investors finding comparatively attractive yields in Treasuries once again.

Economic data was mixed, but the fact that it wasn't highly bearish was cause for a relief rally.  Gross domestic product were slightly bond friendly coming in at a worse than expected -5.7%.  The University of Michigan consumer sentiment index was reported at 68.7, nearly in line with optimistic expectations.  The Chicago PMI seemed to give bonds and notes the biggest boost after being reported at 34.9; a far cry from the previous 40.1 and the expected 42. 

Next week will be even more action packed and the markets should put on a good show to conclude the week with the monthly employment report.  Analysts are expecting another draw of over 500,000 jobs.  While these types of numbers were shocking a few years ago, it has become commonplace. 

Now that Treasuries have turned the corner and we can finally think a little clearer, it looks as though the long bond is well on its way to 119'20 in the September contract at which point be become neutral.  If you are still trading June, this translates into 120'30 but you should be rolling into the next contract month (today was the first notice day). 

If you are trading the notes, we are looking for the September 10-year to see prices slightly in excess of 118 before short covering has run its course.  The September 5-year note should see 116ish again soon. 

We have adjusted the infamous short puts gone bad, see below recommendation for an update.  Once again, if you would like to learn more about using options to hedge, short option trading or aggressive spread trading...pick up a copy of my book "Commodity Options"; it is available in all major book stores.  Sorry for the shameless plug, but I really think that traders owe it to themselves to explore all of the possibilities in speculating and this book was written to open your eyes to alternative approaches to the markets.

* 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.

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.

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

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

*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.