Strategy Recommendation Short 5-year note with insurance for protection

ZF Futures Trading Recommendation, 5-year note

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.

Five year note futures contract ZF $zf_f ZFZ12

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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  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.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. 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. 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. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.

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