July 29th, 2009

"I'm not even kissing up when I say it's about the best book on option trading I've read."  ~ Aaron James, Eastside Financial Group in regards to "Commodity Options" now available through all major book outlets

Rough auction weighs on bonds

Treasury trade pared early morning gains following a lackluster 5-year note auction but the Fed Beige book was the story of the day.  Erratic stock trade seemed to go unnoticed but should keep a floor under pricing. 

The Treasury auctioned $39 billion in 5-year notes at a higher than expected rate for 2.689% and a bid to cover of only 1.92.  This was a far cry from the previous outing that saw a 2.58 bid to cover.  Additionally, the indirect bidder participation accounted for only 35.7% of the demand.  If the auctions continue to see declining demand, the government may have to tighten its belt as borrowing costs tick higher. 

As significant as the previous auctions have been, the "real deal" will be tomorrow's 7-year note offering.  The Treasury plans to sell $28 billion, and the markets demand may be a good indicator of how well the size of such sales are being absorbed. 

The Fed bought $2.999 billion of the $11.707 billion offered by dealers.  They have now purchased nearly $220 billion of the $300 billion slated to be depleted by the end of the summer. 

We are still bullish in the intermediate term but aren't ready to pick a bottom just yet.  Perhaps, tomorrow's auction will provide the opportunity that we are looking for to be bullish at better levels.  We see support in the long bond near 114'15 then again just under 114.  Note traders should continue to look for support near 114'15, but we think that 114 will be seen.  The 5-year note is becoming attractive from the long side but we do see the possibility of a little under 114 should tomorrow's auction falter.

Oops, there was a typo in yesterday's newsletter.  It should have read support in the 10-year note at 115'15 and 115'00 rather than 114'15 and 114'00.  We apologize for the confusion. 

* 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.  Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already be factored into current prices, any references to such does not indicate future market action.

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.

June 29 - Our clients were recommended to sell September Eurodollar futures while buying a 9937.5 call as insurance.  The calls were getting filled near 7 ticks, and the futures near 9933.  This makes the total risk on the trade at expiration $287.50 before commissions and fees. 

*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.