December 17th, 2008

Happy Holidays from DeCarley Trading!

Follow through buying in Treasuries, but will it last?

Slow growth, flight to quality and continued speculation that the Fed will (or is) buying long-term Treasuries continue to push prices to extremes.  Treasuries rallied to push the yield on the 10-year note to approximately 2.10% and the 30-year bond near 2.5%.  The rush of buying comes after the Federal Reserve's "shock and awe" campaign forged yesterday. 

Along with driving yields lower, the Fed seems to be "forcing" investors away from Treasuries and into corporate fixed income securities.  As investors shift asset classes, the market psychology should also shift for the better.  Current corporate bond pricing is detrimental to confidence in the system.  Also, those firms wishing to issue new debt will be able to do so at rates relatively better than the current.  While the odds seem to favor such portfolio adjustments, the timing is questionable. 

In this newsletter, we have been pointing out the tendency for bonds and notes to find a significant high in the month of December.  The recent rally to our original targets supports this premise.  However, now that we are here it seems as though there may be a little room for this market to move on the upside.  Our new projection in the March T-bond is 140'27.  The note on the other hand, has reached our upside target and should struggle to make progress from here.  Aggressive traders may want to sell futures using a call option as a stop, buy puts and sell calls near even money or simply buy a put for those that aren't willing to risk exposure.  Contact us for ideas.

This morning we were recommending that our clients speculate on lower Eurodollar prices by selling the March futures near 98.84 and buying a March 9875 call option for 21 points.  Assuming these fills, the total risk on the trade is 12 points or $300 plus commissions and fees and allows for about 3 months in the market.  This position is referred to as a synthetic put because the payout is nearly identical of buying a put.  However, we believe that the flexibility of being able to lift one leg at a time is an asset.  Also, yesterday's sharp rally caused a scenario in which the at-the-money options have relatively wide bid/ask spreads. 

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 ride 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.

December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21.  The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!

*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.