*All rights reserved.  Reproduction or distribution of this newsletter without prior consent is strictly prohibited.

May 10th, 2010

See Carley at the Trader's Expo in LA, join us on June 11th to talk about "Trading Commodities Like a Girl"

What a week in Treasuries!  

The U.S. dollar might not have the strongest fundamental backing, but it is the best of the worst when it comes to representing stability.  Accordingly, despite criticism of the Fed's monetary policy and quantitative easing, when the going gets tough, money flows into the U.S.  Treasury bonds and notes were a direct beneficiary of capital inflows from overseas during the height of last week's panic. 

Suddenly the meager yields offered by U.S. fixed income products seemed attractive given the perception of little default risk.  On the other side of the coin, many argue that the domestic balance sheet isn't dramatically better than that of Greece.  Nonetheless, panicked market participants needed somewhere "safe" to park cash and Treasuries were the preference. 

An emergency IMF meeting and an EU rescue package brought cooler heads to the markets to trigger a treacherous decent from the Thursday/Friday highs.  However, the volatility might not be "dead".  The Treasury will be auctioning 3  and 10 year notes along with 30 year bonds this week, Bernanke will be speaking, the economic calendar is healthy and the stock market visibly shaken. 

We would be lying if we told you that we could confidently speculate on what might happen tomorrow.  However, we are leaning lower overall but respect the prospects of a last gasp rally that could bring the June bond as high as 122ish  before a larger roll-over can happen. 

I have been a broker for over six years now and have had the pleasure (and pain) of witnessing a lot of incredible things; but the end of last week was among the most challenged market conditions.  I've seen larger moves in bonds in a single trading session, but I have never seen the fear that was displayed in this move.  The bids and asks disappeared on the electronic options and when they came back, they were enormously wide.  This made it nearly impossible to trade options via electronic execution.  However, on Friday we were able to get what we felt to  be fair execution in the open outcry pit.  For those without access to open outcry (trading with some discount brokers who only offer electronic products), it might have been a very expensive lesson!  Any money saved in commission would have paled in comparison to the cost of trying to exit (or enter) a bond option online. 

* 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.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

April 22 - Our clients were advised to sell the July bond 121 calls for 22 or better, and were filled this morning on the rally. 

May 7 - Clients were recommended to buy back the July 121 calls and sell the July 124 calls instead.  The swap was done at a debit of 1'20 and left some money on the table but the goal must be capital preservation at this point.

May 10 - Clients were advised to sell the July 115 put for 36 or better

 Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.