February 3rd, 2009

See DeCarley's article on option selling in the bonus issue of Stocks & Commodities Magazine!

Fresh supply concerns reverse safe haven bid

The fed is looking to add emergency liquidity programs and has extended the expiration of currency swap lines with a range of central banks in an attempt to relieve credit market strains.  As a result, trade seemed to have shifted focus back to supply concerns. 

It was a slow news day; the date that was released was relatively mixed.  Pending home sales were a positive surprise but auto sales were much worse that projected.  GM sales were down about 50% in January and Ford sales weren't much better.  The numbers were the worst since the early 1980's. 

We were expecting yesterday's short covering to spill over into today's session but that wasn't the case.  Accordingly, we have altered our perception of the market and now believe that prices will continue to grind lower through tomorrow's session.  However, we could see a much more meaningful short covering rally as traders square positions on Thursday ahead of the employment report or perhaps even Friday morning on the announcement. 

Confirming our expectations for a possible short covering rally; we feel as though the equity markets will trade weaker as the week progresses as traders remain cautious in regards to the employment market.

We see support in the March 30-year futures near 125'14 and again at 126'15.  The March 10-year note should find support near 122'02 but our longer-term target remains below 121. 

Hopefully you were able to take a nice profit in the Five-year note trade recommended earlier in this report.  If not, it may be a good idea to liquidate as we are looking to wipe the slate clean and reassess.  Those that took the Eurodollar trade should look to exit near 98.93. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

February 3 - Sell the March 116 puts for 25 or better, it will take weakness to get filled. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

January 27 - Buy 1 March 5 year note at or near 118'03

·         February 2 - If you are still holding this trade, place an order to sell at 119'01 to take a profit of about $937.50 before commissions and fees (some of you may have taken a quick profit on Friday).

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

January 30 - I like buying the March Eurodollar near 98.75 looking for a quick move higher.  We don't expect the March contract to break out of its trading range...and it is a slow move anyway.

·         Place an order to sell this position at 98.93 to take a profit of $450 before commissions and fees.  Those that entered at better levels than that noted above may want to take profits a little early as this trade is against the grain of fundamentals.

*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.