January 16th, 2009

Counter-trend Friday in Treasuries.

End of week position squaring and confusion over a choppy stock market resulted in higher yields and lower prices on the long end of the Treasury curve.  Shorter maturities (bills and 2-year notes), on the other hand, traded steadily higher throughout the day on varied economic news. 

The day's closing prices don't do justice for the volatility witnessed in the session.  Early morning trade saw the long bond down approximately three handles and the 10-year note closer to two.  Perhaps some of the irrational trade was the result of the shortened trading session ahead of the Martin Luther King day weekend as traders were pressed for time, facing significant market data and an Obama speech regarding the bailout packages. 

According to the University of Michigan, consumer sentiment has improved slightly from last month.  The index was reported at 61.9, nearly two points better than analyst expectations.  The most anticipated number on the day was the CPI which reported that inflation ticked lower by .7%, this was less than the expected 1%.  All in all, a mixed bag of nuts for Treasury traders. 

Putting pressure on the notes and bonds was TICS (Treasury International Capital System) news that suggests that Treasury buying from China and Japan has slowed on the long end of the curve. 

In observance of the Martin Luther King Day holiday weekend, the bond pits will be closed on Monday.  However, there will be an abbreviated electronic session in which Treasury futures and options products will cease trading at noon Central time. 

If you recall the events that took place last year over this particular holiday weekend (does a rogue trader from Societe Generale crashing global equities ring a bell) you will likely be content on the sidelines.  We prefer to move to the sidelines and resist making any market calls until we see trade on Tuesday but I am not convinced that the bulls have completely fled the market. 

Have a great three-day weekend!

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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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!

·         January 8 - If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract. 

·         January 9 - Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report.  It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.

January 9 - If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade.  This morning we were recommending that our clients sell the March futures contract near 99.16.  Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325).  This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price.  Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs. 

·         January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575.  However, this doesn't consider the loss on the long call.  Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless.  Hopefully a market recovery will allow for exit of the call at a better price. 

*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.

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 and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  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