Bearish Treasury Market Opportunity Using Options

This recommendation was emailed to brokerage clients on April 17th 2015:




On the radar:

A minor flare up in Greece concern seems to have created a high probability bearish opportunity Treasuries. We like the idea of using a cheap, and limited risk, play in the 5-Year note in hopes of a trend reversal. Let's sell the 5-year note future and buy a call option for insurance

Those looking for a directional play in Treasuries without the massive risk that comes with trading the U.S. 30-Year bond, should look to the 5-year note. The moves are typically less erratic and the options are cheaper, making it possible to employ low risk strategies.

With the Fed's interest rate hike campaign looming in the near future, prices at questionably lofty levels, and our expectations of another new high in equities, it is hard to imagine the 5-year note traveling much beyond the January highs. Thus, we like the idea of going short a June futures contract and purchasing a June 120.75 call.
The cost of the call should be about $360 (23 ticks), which will represent your maximum risk on the trade prior to transaction costs. In other words, this trade will give you 36 days in the market with a risk of under $400, and theoretically unlimited profit potential.

Should things unfold as we think they might, it is possible to see the 5-year note return to the bottom of the trading channel near 119. In such a scenario, this position could potentially be profitable by roughly $1,000. Initial support would come in near 119'24.

Disclosure and Disclaimer: Past performance is not indicative of future results (seasonal data tells us what has happened in the past, not necessarily what will happen in the future). 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. Past performance is not indicative of future results.