December Treasury Bonds are down 7/32 at 119:06 this morning as I write. The enclosed chart shows that the directional movement indicators have crossed to the bear side as of yesterday’s close. My other indicators show that about half are bearish and the other half are neutral. The 119:00 area is an important trend line and moving average support level. Overnight, the bonds pierced through that 119:00 level but has since rebounded to where prices are this morning stated earlier. If the 119:00 area does not hold, then 117:00 will be the next major trend line support level, followed by the 113:00 area. With those support levels in mind and the half and half bearish attitude of my indicators, I recommend buying one December T-Bond (115:00 strike) put option and sell 2 December T-Bond (113:00 strike) put options at a total credit of 4/32, or $125 gross. These options expire in 36 days. If the market doesn’t make it that low by expiration then we will keep the $125. The maximum gain would be $2000 if prices end right at 113:00 in 36 days. The risk is if prices spike down to and below the 113:00 area in the very near term. We would have to either liquidate or adjust our position if that happened.

Oct. 15, 2009
David Hall