Buy’em when nobody wants’em
March 16, 2012
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Buy’em when nobody wants’em
It has been a rough week for anyone trading on the side of quality. Suddenly the risk off trade of 2011 has transformed into the risk-on trade of 2012. However, one must recall that the year is still young. As we have said before, the Fed has a lot riding on low interest rates and they won’t sit back and watch their investments in market manipulation go up in smoke.
Some of you might recall last year at about this time traders were concerned over the Fed’s expiring Quantitative easing programs and what many thought would be a fall-out in Treasury prices. Yet, a year later we are actually at a much higher price. This time around, the Fed continues to roll out its programs and has pledged low target rates through operation twist and others for years to come. Accordingly, we doubt the Treasury bull will roll over dead without a fight.
Talking heads seem to be promoting portfolio allocations into stocks and away from Treasuries but this conventional wisdom could be a little too prominent. Remember, most market timers (retail traders anyway) are wrong more than they are right…so blindly following the herd can be catastrophic. If you are a bear that caught this move, we strongly recommend you take profits or defend the position. Markets don’t travel in one direction indefinitely. Although weekly and monthly charts suggests we could eventually move much lower (low 130’s to high 120’s), we think this move is nearly exhausted. A final flush to the 134′22 area can’t be ruled out but we prefer being bullish on large dips. If we are right about the rebound, the rally could see 139ish in short order. If you are trading the 10-year note, another flush would mean prices as low as 127′25.
From yesterday’s newsletter, but still valid:
As we suspected, yesterday’s move is being attributed to large funds, prop desks and individual floor traders that were short puts against what had been multi month support. Once the market broke, they were forced to sell futures against their puts and this acted like kerosene in a fire. In addition, futures swing traders attempted to buy into the dip near support and likely had their corresponding sell stop orders elected. Similarly, break-out traders had a field day selling into the massive break-down.
In yesterday’s Stock Index Report we mentioned the possibility of some margin call follow through selling in markets such as the Yen and Treasuries. It appears that most of the liquidation occurred in the overnight session. Each market dropped precipitously while most traders were (trying to) sleep.
Thursday’s session showed signs of stability, but there certainly was a lack of a bid once prices reached the unchanged mark. In addition, we noticed that the price of put options actually picked up a few ticks with the market near unchanged (due to increased in implied volatility). This suggests option traders are bracing for even more volatility (in one direction or the other).
* 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.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
**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.
3-14 Clients were advised to sell the May132 30-year bond put for about 29.
3-15 Some sold 131’s for about 28 ticks.
In other markets….
2 – 16 – Clients were advised to sell March Yen 124 puts near 29 ticks or $362.50.
2 – 22 – Clients were advised to sell the April Yen 120 puts near 30 ticks or $375.
2-22 – Clients were advised to buy back the March Yen 124 puts near 70 (a loss of about 41 ticks) and sell the April 121 puts for about 40 ticks.
3-2 – Clients were advised to exit short April Yen 121 puts at a loss of about $425, and to sell April 126 calls and 119.50 puts for $1,000 in premium. The goal is to recoup the premium lost as volatilty dies.
3-5 – Clients were advised to sell April Euro strangles using the 127 puts and the 136.50 calls for about 61 ticks or $762.50.
3-7 – Clients were advised to sell May crude oil strangles using the 123 calls and the 90 puts. Premium collected was near $1.04 ($1,040).
3-12 – Any client holding short 120 puts in the Japanese Yen were advised to sell April 125 calls near 38 ticks to lower the delta of the exposure (mitigate risk to the downside) ahead of the BOJ announcement.
3-13 – Clients were advised to buy back the 125 calls sold yesterday to lock in a quick profit of about $250 per contract as well as the April 126 call sold earlier in the month as part of a strangle for a profit of about $300 before transaction costs. The corresponding puts are underwater, we hope to offset them in the near future or re-sell calls on a rally.
3-13- Clients were advised to buy back their May crude oil strangles for a quick profit of about $460 before commissions and fees.
3-13 – Clients were advised to buy back short Euro 136.50 calls near 7 ticks to lock in a profit of $275 per contract (22 ticks). We will continue to hold the short put side of this trade.
3-13- It was recommended that clients sell the May S&P 1450 calls for about $8.75 in premium or $437.50 per contract.
3-14 Clients were advised to buy back any remaining Yen puts (119.50’s and 120’s) at sizable losses (some well over $1,000 per contract) and replace them with May 116’s and 115/124 strangles, respectively.
3-14 Clients were advised to buy back their short Euro 127 puts for about 19 ticks to lock in $175 per contract (added to the profit on the call side of this trade, the total profit was about $450 before transaction costs).
(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)
Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
1-866-790-TRADE
Local : 702-947-0701
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*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.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.
