December 16th, 2008

Happy Holidays from DeCarley Trading!

"Shock and Awe" from the Fed.

The Fed shocked the markets with a cut much larger than the expected 50 basis points.  In fact, the Fed didn't even cut 75 basis points.  Instead, they have announced a new target "range" between 0% and .25%.  With the Fed Funds rate essentially at zero, the Fed finds itself in uncharted territory. 

Richard Yamerone, economist at Argus Research commented on the move, "The message is simply the Fed stands ready to do everything in its power to stop the economy's free fall."

Despite contrary opinion, the Fed claims that they still have ample ammunition to combat what could be the most significant recession since the Depression.  They insist that they are exploring tools other than rate cuts, to revive the struggling economy.  Some are expecting to hear more details as the meeting wraps up. 

Adding to the Treasury euphoria, the Fed also made it clear that based on challenges in the domestic economy, interest rates will likely remain low for "some time". 

In yesterday's report we made the following call:

We are sticking with our initial targets of 138 (maybe even 140) in the long bond and just under 127 in the ten year note.  However, we also recognize that if a continuation of the rally is in fact going to take place it must do so sooner rather than later.

The prediction turned out to be relatively accurate but we are now forced to look ahead to the remainder of the week, and this is a much more difficult call.  While the 10-year note looks to be approaching major resistance levels the long bond looks to have potential to move to 140 before finally hitting a ceiling. 

The note should run into trouble near 127'15 but bears should be cautious, as this isn't the same market that existed a few short months ago.  The risks are much, much higher and so is the difficulty level.  Aggressive traders may look to buy puts and sell calls on a move to the mid 127's.  Risk averse traders may look to simply buy out of the money puts.  For example, should the market rally a bit more it may be possible to buy the February 122 puts and sell the February 132 calls for close to even money.  Stay tuned for more specific ideas or call for guidance. 

We were right to be patient with our bearish stance in the Eurodollar.  The March contract is becoming an attractive short, but I prefer to give it a little more time. 

 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

November 26 - Buy the January 10 year note 115 puts for about 15 ticks.

November 18 - I like selling the January 130 calls for 30 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

·         These are both well underwater, but we haven't given up on the long-term prospects.  We recommend holding on for now. 

·         You may have taken our advice to roll into the March 136 calls for even money.  This lowers the delta and the margin, hopefully improving the odds of riding this out. 

·         If you aren't willing to rid this out to 138, you should be out of this trade.  The risks are high, taking deep pockets to ride this one out.   

November 20 - We were recommending to buy the December T- note 112 puts for about 19 ticks. 

·         November 24 - You can get in at a better price, you may want to buy the 113's.   

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

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.