Ultra low risk, low stress way to play the Treasury market
Market: $ZF_F September 5-year note futures, ZFU2
Buy or Sell?: Buy with purchase of September 124 put for insurance
Range: Trend-line support near 124, and as low as 123'20ish could be an opportunity to get bullish
Reason for trade: We are waiting for better prices to possibly sell puts against weakness in the 30 year bond in light of upcoming seasonal strength in this complex. However, a cheap and limited risk way to get involved in the Treasury market at current levels is a synthetic in the 5-year note. It is possible to purchase a September 124 put for about 8.5 ticks, or $132 and go long a futures contract at 124’04.5. This creates a total risk of $272 per contract before transaction costs, accordingly, if we are wrong it will sting a bit but won’t incur too much collateral damage. The September options only have 11 days to expiration; this is intended to be a relatively short-term trade but offers potentially unlimited reward potential.
In addition to seasonal and technical support, it feels like the current short squeeze in the S&P could run out of steam in the coming days, if so it wouldn’t be out of the question for the 5-year note to retest recent highs near 125. Such a move would result in a profit of approximately $730 per contract.
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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.