September 2nd, 2008
Treasury liquidity picks up (slightly) post-Labor Day and so do prices
The Treasury complex enjoyed a healthy bid after being weighed down in early trade buy stronger equities and plummeting crude oil. The failure of Gustav led to the unwinding of hedges and speculations of the opposite outcome in last week's trade. However, once position squaring took place fresh buying took place.
Continued signs of slowing global growth may have been a contributor to lower crude oil prices but it gave bond traders reason to buy. Additionally, lower energy prices are lifting some of the inflation concerns in the bond trading pit and have accordingly paved the way for higher prices.
Aside from the implications of hurricane Gustav, there was little economic news to speak of. The release of the day was the ISM index which suggested a moderate contraction in manufacturing but was relatively on target with most analysts expectations.
Traders are already looking forward to Friday's jobs data. Perhaps this is the event that is needed to pull traders and liquidity back to the markets. Most analysts are expecting the number to be in negative territory which has been the trend over the past several months. Along with bringing volume, this may be the market's opportunity for a short squeeze. Given the circumstances, there may be a relatively violent spike high before or immediately following the release of the non-farm payrolls. However, if this prediction becomes a reality it should also be a great time to be a bear.
I have a target in the December Treasury bond futures at 118'30, but welcome the opportunity to get positioned on the short side at much better prices (keep in mind that the December contract is trading at a premium of about a handle to the September). The December 10 year note futures, may see prices as high as 116'15 but would be comfortable recommending short positions at, or near, this level. Please see revision to earlier recommendation below.
Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.
August 12 - If I am right, you may be able to sell the October 121 calls for 20 or better. Be patient and let the market come to you...if it doesn't it wasn't meant to be. August 15 - This order would have been filled today. I am looking for an opportunity to buy this back quickly, contact me for details.
August 25 - Should the market have another day like today, it may be a good idea to add on. If you are properly margined and willing to take on the additional risk, look to sell the 122 call for 20 ticks or better.
August 29 - Put in an order in to buy the October 121 Bond calls back for 6 ticks or less.
September 2 - Hopefully, you were able to liquidate the position this morning at a nice profit. The low of the day was 7 ticks, had you followed the recommendation exactly you are still short the 121 call. If that is the case, continue to work the order at 6, but contact me for intraday guidance. It is better to pay a little more for it and get out, than to hang onto a trade to squeeze out a few extra bucks.
Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.
August 18 - Sell 1 Sept. T-Note @ 117'17 GTC, contact me for guidance or if you have questions.
September 2 - Cancel the order above, sell 1 December Treasury Note Futures contract at 116'13 or better.
September 2 - If you are looking for something a little "slower" in terms of profit and loss volatility, try selling the December 2 year note at 106'15.
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.
