Skin in the Game
Market: $ZF_F December 5-year note futures, ZFZ2
Buy or Sell?: Buy, with purchase of a 123.75 put for insurance
Range: Recent sell-off has put the 5-year note at the bottom of its trading range, 124ish with strong support at 123’20.
Chart:
Synthetic Call Option in the 5-year Note
We aren’t sure the selling is quite over in Treasuries, so we’ll wait to make any recommendations in the 30-year bond. A low risk way to gain exposure to the interest rate market is to speculate in the 5-year note. This contract carries low margin, and much less risk than trading the longer dated futures contracts. It also offers cheap options that can be used to insure trades against the possibility of being inaccurate.
The Treasury market has been beaten up in recent sessions and investors move from safety to risk assets. Nonetheless, a considerable amount of headline risk looms and could easily spark a swift reversal. After all, we’ve yet to see the typical October turmoil in the equity markets that often triggers a Treasury rally…but the month isn’t over.
We like the idea of nibbling on the bullish side of Treasuries with limited risk. This can be done through the purchase of a December 5-year note futures contract and a December 123.75 put for insurance. This creates a trade with risk limited to about $450, and theoretically unlimited profit potential. If we are right about a move back to the top of the trading range, this position would be profitable by about $650 before commissions and fees.
Thanks,
DeCarleyTrading.com
Futures, Options, Integrity
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