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.
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.
Futures, Options, Integrity
**There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. 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. 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.