
Treasuries have been on a tear since the smell of QE has been back in the air. If there is one thing we've all learned, it is that traders are fickle...and attempting to predict prices is all about understanding that the "flavor of the week" is just that, a temporary driving force.
We've been bullish Treasuries since mid August; we haven't completely turned bearish up here, but the quick and dramatic gains certainly warrant caution to the bulls and statistically should see a sizable pullback at some point within the next week or so. With that said, we wouldn't be surprised to see further gains in the complex but playing hedged positions in the five year note gives traders an opportunity to gain exposure to the short side of the Treasury market with little, and limited, risk. In the meantime, traders can patiently wait for better prices to get into more aggressive markets such as the 30-year bond and 10-year note.

We like the idea of selling the December 5-year note futures contract near 124'18 and then buying the October 124.50 call as insurance. The call covers the risk on the futures tick for tick, and will run you about $300 in premium; however, at these prices the futures is 3 ticks in the money, so the total risk on the trade is about $220 plus commissions and fees per contract.
If the market sells off, we can consider locking in a profit on the future and holding on to the long put. If the market rallies, we can always contemplate locking in a profit on the call, and holding the short futures contract (which would mean theoretically unlimited risk). Good luck!
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**Seasonality is already factored into current prices, any references to such does not indicate future market action.