November 14th, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

U.S. backed Treasuries fall into favor.

Yesterday's lull in light of swiftly moving equities seemed suspect; today's trade in the interest rate arena made up for lost time.  What started out as a meager bid on weak economic data turned into a full-fledged rally in longer term maturities.    Also, portfolio managers may have taken advantage of yesterday's large equity rally to shift exposure from stocks to bonds.

Retail sales were notably worse than analysts' estimates.  The headline figure was reported to be a negative 2.8% despite expectations for a draw of 2.1%.  Removing the struggling auto industry from the data suggests that sales dropped 2.2%.  On a slightly brighter note, the University of Michigan's consumer sentiment index was reported to be slightly higher than many were looking for at 57.9.

In yesterday's newsletter I mentioned that we were likely in store for another run higher in the 30 year bond futures, and today we got it.  The question is now whether or not the highs have been set.  While logic may say that we have, my instinct tells me that this rally isn't over. 

I see resistance in the 30 year Treasury futures near 119'15 and again near 120.  However, should the light volume and negative economic data environment continue we could see prices as high as 121.  Likewise, the 10 year note may be on its way to 118. 

Should we see prices at such elevated levels, I will become significantly bearish.  I like the idea of selling calls against rallies in the long bond and possibly selling futures in some of the shorter maturities.

Those short the 5 year note as recommended previously are likely getting a bit impatient.  Some of you may have purchased the 116 calls as suggested earlier in the week, and are thankful for doing so.  In my opinion prices and yields in the shorter maturities have overdone themselves and the odds of a correction seem likely.  I regret the timing of the recommendation but feel as though patience will be a virtue. 

Have a nice weekend!

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

November 4 - Sell 1 December Five year note futures at 115'16.

·         November 11 - Some of you may have acted on the suggestion to buy the 116 calls for protection, the cost was $500.  If not, don't panic...patience is a virtue.

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.79

·         October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy.  Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees.  The profit potential is theoretically unlimited!!

·         November 14 - We ran out of time on this trade, clients were advised to liquidate the entire spread this morning with the futures near 97.665 and the option worth 1 tick.  Assuming these fills (and those shown above as entry) the loss is about $112.50 before (2) commissions and fees.

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