This is probably much ado about nothing
As treacherous as the financial markets have been this week, one might assume there was some sort of significant economic development, or political calamity. However, we've had a relatively boring slate of economic news and global political events have been relatively tame.
This type of price action "should" have occurred months ago when the Middle East and Russia was on the verge of war. I'll admit, when the markets found a way to weather that storm my bearish inclination dissipated a bit. We have been waiting for this type of much needed deep correction for several months; ironically it occurred with relatively random timing and lacking a clear catalyst.
We realize many are blaming the Ebola scare but we have to give the general public more credit than that. Although it is clearly a concern, the odds of an Ebola breakout that dents GDP is slim.
A better explanation of the volatility in our eyes was a massive "blow up" of hedge funds. Short Treasury, long S&P, and long crude oil trades were force liquidated earlier this week, leaving many markets in chaos. Once margin calls are washed out, we suspect the markets will recover. However, the question remains: is it over?
In regards to actual timing, our idea to turn bearish Treasuries was probably good...but in regards to price, it was HORRIBLE
We are a little disappointed in ourselves; we spent the entire year being Treasury bulls. We bypassed multiple opportunities to sell calls (a bearish strategy) because of our opinion in this market and our fear of exactly the type of rally that took place yesterday.
We patiently waited for the short squeeze that would force the bond bears out of what was an overcrowded trade (which we had been calling for months). Yet, once we finally decided Treasury prices had moved high enough for us to comfortably turn bearish, the "mother of all short squeezes" hit the market.
On Tuesday afternoon we recommended to sell December bond 147 calls, less than 24 hours later forced liquidation of a hedge fund (or two) forced prices to a dramatic 5 plus handle rally! We've only seen this type of move on two other occasions in the last decade and each of them were triggered by a massive, and unexpected, event. This type of move without such a catalyst was unheard of...until now.
Going forward, we continue to believe that the bond and note highs are very near. In fact, they could very well be in already. With that said, the market likely won't go straight down. If there are any shorts left in the game, they will likely look to any dip as a place to get out (buy).
Treasury Market Ideas
**Consensus:** The squeezing high we knew was possible, turned out to surpass our wildest expectations. Nonetheless, we believe the highs in this complex are very near.
**Support:** ZB: 141'29, 139'20, and 136'29 ZN: 125'29, 125'04, 124'16, and 123'17
**Resistance:** ZB: 144'05, 146'04, and 147'29 ZN: 127'23 and 128'16
Position Trading Recommendations
*There is unlimited risk in option selling
Sell-offs can get out of hand
Investors tend to sell in a fury of panic; thus, there is little regard to price. They simply want out as soon as possible. Further, we suspect that margin call managers have been active force liquidating client positions.
When markets become irrational and erratic, nearly anything is possible. Today's afternoon rally was promising, and perhaps the lows are in. However, the chart suggests we could see a probe low into the 1788ish area. If see, the bulls should be looking at this level to pounce.
Our original idea was to sell ES puts once prices retreated to the current levels. However, in light of our hardship in Treasuries. (perhaps the worst timed trade of my career), we'll hold out for a move to the above noted level.
Stock Index Futures Market Ideas
**Consensus:** Trend-line support broke, sending prices into free fall. We prefer being bullish on dips, but the dip could see as low as 1788ish.
**Support:** 1810, 1788, 1748
**Resistance:** 1868, 1908, and 1935
Position Trading Ideas
Day Trading Ideas
**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**
Buy Levels: 1813 and 1788
Sell Levels: 1871, 1894, and 1912
In other markets....
June 12 - Buy September mini corn futures near 440.
July 8 - Add on to mini corn scale trade.
August 19 - Add to the mini corn and wheat scale trades by purchasing December mini futures contracts.
August 21 - Sell a December DX futures contract and buy an October 83 call for about $300. The total risk on the trade should be about $1,000 before commission (depending on your fill prices). The profit potential is theoretically unlimited.
August 26 - Roll September mini grains (wheat and corn) into December contracts to give the market more time to recover.
September 4 - Sell October DX 83 call to lock in a profit of about $700 before transaction costs. The futures portion of this trade is underwater, we are hoping for a reversal in the coming week or so.
September 9 - Sell November Euro 133 calls and 125 puts for about 65 ticks ($812.50).
September 10 - Sell December crude oil 82/98 strangles for about $1.10 ($1,100).
September 15 - Buy March 2015 sugar 18.00 calls near 32 ticks.
September 24 - Buy back the November Euro 133 call to lock in a profit.
September 24 - We've reached our pain threshold in the dollar, let's exit the DX and go to the option market. We recommend selling double the quantity of the December Euro 123.50 puts and the 132 calls for about $800 per strangle.
September 29 - Buy back the December crude oil 82 puts to lock in a profit of $370 to $400 per contract, and replace them with short 86 puts. This brings in more premium and rebalances the trade.
October 2 - Buy back November Euro 125 puts at a small loss (combined with call you should be slightly ahead, or at least breaking even on this venture after commissions).
October 2 - We made a big mistake rolling our 82 puts higher. Let's rebalance the trade and look for volatility to decline by offsetting the existing strangle and selling the December 95/82.50 strangle.
October 9 - Buy back 95 crude oil calls to lock in gain on that side of the trade.
October 10 - Sell December crude oil 92 calls for about 60 cents to hedge the 82.50 puts.
October 14 - Sell December bond 147 calls for about 30 ticks.
October 15 - Roll the December crude strangles into a January 70/90 strangle AND a December 74/88 strangle.
October 15 - We were clearly a day early on this one, roll into December 151/142 strangles.
(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)
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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.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
**There is substantial risk of loss in trading futures and options.**