January 21st, 2009

Supply, supply, supply.

Treasury notes and bonds continue to be weighed down by the massive expected supply of Federally backed fixed income securities.  The fundamentals that dominated trade in late 2008 remain, but the market's interest in the bullish factors dissipated while the bearish aspects have flourished. 

Economic data continues to look bleak, the U.S. Dollar index has seen significant gains, equities have plunged several percentage points in recent weeks, yet Treasuries can't seem to "get over" supply and inflation concerns.  Additional selling pressure is coming as, even with equities struggling, investors are finding more attractive places to park their investment dollars than Bonds and Notes.  All of this has been relatively known and predictable, the problem is that market pricing has been unpredictable...but that is what markets do.  If it were easy, we would all quit our jobs and trade commodities!

We are targeting 128'29 in the long bond for now, but are cautiously looking to equities as a retest of the November lows in the S&P are a real possibility.  The 10-year note on the other hand seems destined for 123'26.  While we are fundamentally bearish, we believe that there could be significant bounces from such levels.

I apologize for the brevity, we are traveling to an Introducing Brokerage conference hosted by our clearing firm, PFG.  We believe that this opportunity will promote the growth and evolution of DeCarley Trading and in turn allow us to provide our clients with better service.  Unfortunately, the obligation will prevent me from distributing this newsletter on Thursday and Friday.  However, I will be available by email, phone and instant message as always.  Feel free to contact me. 

Treasury Bond and Note 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.

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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.