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*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited. January 25, 2012 Click here to sign up for our next Free trading webinar...FOREX Trading Math!QE or not QEIt has been a rather wild day, so we'll keep this short and sweet. The Fed didn't announce another round of quantitative easing but they might as well have...pledges to keep rates ridiculously low at least until late 2014 triggered a massive short covering rally in Treasuries across the board. Although, it was the shorter end of the curve that saw the most squeezing action, the 30-year bond was up over 2 handles on the day at one point. However, the same celebration rally in equities quickly prevented bullish traders from getting overly excited. We aren't certain why the Treasury market acted so surprised by the Fed's persistence at lower rates. After all, in yesterday's newsletter we noted that the Fed Fund futures had priced in a slim to none chance of a rate hike in 2012. We didn't mentioned this yesterday, but the odds of a rate hike by the September 2013 meeting were under 20%. In other words, today's news wasn't anything new or unknown. It could take a day or two to work the chaos out of the market but it doesn't "feel" like we'll get much directional trade in the coming session or two. Although we came into the session bullish, today's sharp rally has likely wiped out many of the complacent shorts (which is what we were looking for to happen) and this leaves us neutral. In fact, clients were recommended to sell March bond strangles (137/147) in late afternoon trade. These options only have about 30 days to expiration, and assuming a few days of sideways action should see sharp premium erosion. If you are following our 5-year note synthetic trade, we had recommended offsetting the short futures contract on Monday to lock in a profit of anywhere from $550 to $600 per contract and where holding long June 123.50 calls waiting for the market to rally back. Today we got what we were looking for, so clients were advised to re-sell the 5-year note futures near 123'23. Given the profit on the previous futures venture, the trade is now a freebee (the worst case scenario is a loss of transaction fees and slippage). Those following our short put trade (the March 134's for 29 ticks), we instructed clients to offset the options at a profit of about $250 prior to the Fed announcment this morning. We are overall neutral, but a large dip in the notes to the mid to low 129's and the mid to low 139's in the long bond might intrigue us to be bullish.
* 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 factored into current prices, any references to such does not indicate future market action.
Treasury Bond and Note Option and Futures Trading Recommendations**There is unlimited risk in naked option selling.
1-17- Clients were advised to sell the March 5 year note futures contract near 123'19 and purchase the June 123.5 call for about 43 ticks to insure the trade (limit risk to about $650ish before commissions and fees). This trade has a lot of time, unlimited profit potential and closed risk. 1-23 Clients were advised to lock in a profit on the short 5-year note futures contract near 123. Depending on fill prices, this leg of the trade netted about $550 to $600 per contract before transaction costs. We are still holding the long call that was purchased for protection. 1-23 - Clients were recommended to sell the March Bond 134 puts for about 29 ticks, or $453. 1-25 - Clients were advised to buy back their short 134 puts for about 13 ticks prior to the Fed announcement. Assuming an entry of 29 and exit of 13, the profit was $250 per contract before commissions. 1-25 - It was recommended that our clients re-sell the 5-year note futures contract (bought back at a profit on Monday, see above) near 123'23. In light of the profit on the first entry, this is now nearly a free trade (ignoring transaction costs and slippage), limited (almost no) risk and unlimited profit potential from here. 1-25 - Clients were advised to sell March strangles using the 137 puts and the 147 calls for about 47 ticks or $735. In other markets....
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