March 19th, 2009

Thanks to all of you who purchased my book, "Commodity Options", I appreciate your patronage!  Don't forget to write a review on Amazon.

Ultra-short Bond ETF's killed the bond bear

Yesterday's bond and note rally marked the largest single day drop in benchmark yields since 1987 (based on the cash market close).  Today traders were simply attempting to digest the news. 

Treasury futures spent the day consolidating after being the victim of a quantitative easing bazooka.  However, despite the relatively calm session I am not convinced that the volatility is behind us.  I have only seen this size of a move once  before, in the fall of last year, and I happen to remember a consistent rally following the spike.  Whether or not there is fundamental basis for Treasury buying is irrelevant.  Technical trade, short covering and governmental policy will dictate prices in the near term.  In this type of environment, it is better to be safe than sorry.  I recommend that anyone holding multiple bearish positions, lighten their load as the risks will be elevated going forward.

My guess is that while many of the shorts were likely squeezed out in yesterday's spike high, there are more.  Also, It seems as though the equity market is vulnerable to a pullback, if this occurs it should provide additional support to Treasury futures. 

I hate to say it, but I mentioned at one point last week that the newfound popularity of ultra short bond ETF's seemed to be suspect.  Too many bears and new bearish products suggest that there are higher prices yet to come.  As mentioned in yesterday's report, we could see the 30-year bond trade back into the high 130's and even low 140's.  At this point, I am expecting the 10-year note to trade above 130. 

In my conversations today, I ran across a handful of short option traders with accounts at a discount brokerage firms.  As I have mentioned in the past, these firms are built around a business model in which they make very little in commission revenue per transaction but survive by doing large volumes and benefiting from the float (interest earned on client deposits).  They don't have "brokers", instead they are typically staffed with clerks that handle massive numbers of accounts.  Accordingly, during highly volatile situations they don't have the manpower, nor can they afford the risk due to ultra-low commissions, to give individual accounts the attention needed to prevent unnecessary margin liquidation. 

The benefit of working with a brokerage firm such as us, DeCarley Trading, is that we won't blindly liquidate positions.  Instead we work with our clients to ensure that they have a chance to rectify any margin deficiencies along with us as opposed to at the terms of an inexperienced discount brokerage clerk.  We aren't necessarily the cheapest when it comes to commission rates but we are competitive and in our opinion the money spent in additional margin costs will be easily made up for in your bottom line.  Imagine being involuntarily closed out of several short call options on yesterday's spike in a properly capitalized account in which there was no previous margin call...it sounds like it happened more than once yesterday.  The additional commission costs to trade with us as opposed to a discount broker are minimal in relation to the damage that can be done in ill-timed forced liquidation.  Don't trip over dollars chasing pennies!

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

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.

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.