December Treasury Bonds are unchanged this morning at 119:18 as I write. The enclosed chart shows that the directional movement indicators are bearish with a flat to declining ADX line. That suggests that there is now robust trend at the moment. The chart also shows that an intermediate term uptrend line was broken last week along with several moving averages. Now, those moving averages have become resistance overhead which include some that I follow such as the 5 day exponential average which is currently at 119:22, the 40 day exponential moving average which is currently at 119:28 and the 200 day exponential moving average which is currently at 120:18.

Followers of this letter should be short one December T-Bond from 119:16. Followers should also be long one December T-Bond (115 strike) put option from 50/64 and short 2 December T-Bond (113 strike) put options from 27/64 for a combined credit of 4/64 or $62.50 gross. The trend is down, but because the indicators are not showing a solid down trending attitude in the bonds, I recommend selling the December T-Bond (119:00 strike) put option at the market right now. You should be able to get a fill around the 1 46/64 area. This will turn this trade into a covered put write strategy. The December Bond options expire in 32 days. If the bonds close below 119:00 in 32 days then we will make 16/32 plus 1 46/64 profit, which is $2218.75 gross. Otherwise, we have 1 46/64 of protection from our sales price which is 121:07 as our breakeven at expiration. So, we will make money on this position at expiration in 32 days if prices are anywhere below 121:07.

In the mean time, if the bonds begin to turn from bearish to bullish on the indicators, we will possibly need to either liquidate or adjust our position within those 32 days.

Oct. 19, 2009
David Hall