Tuesday, November 30, 2010

New ZB Trade

As mentioned in a previous post on this trade, I was looking to initiate another short position when the opportunity arose. I got short at 126'20 and again at 127'20. I also sold a 129 call for more than a point so essentially it's getting short at a little over 130. This is the last of this position I am comfortable adding to at the moment. I'm still doing my homework on this trade. For instance, why would a $100,000 face value no coupon bond be selling for about $127,000 right now? Because ZBs are deliverable on a 6% yield basis, so there is a deflater/conversion factor calculation that has to be applied to the current price at time of delivery that brings it back in line. Right now I'm comfortable with the amount of risk I have on just based on technicals, a hunch that 30-year yields have hit a low and have nowhere to go but up, and QE2 bond purchases being fully priced in at this time. I believe there to be an upside price risk in this trade if the Euro region tanks and thus we see another flight to safety in the US dollar and Treasuries. For now I'm going to attempt to trade in and out on a short term basis using a position size that would allow me to stay in the trade should we in fact see some panic that pushes Treasuries higher. And thanks goes to Tom Sosnoff for turning me on to the idea. After initially analyzing the trade and because of the leverage involved with financial futures, I like the risk/reward offered on this idea.

Trade Update 12/1/10
I had set a GTC order to cover these two short contracts at 126'04. Though I was happy to wake up and find I made $2,000 while I was sleeping, it was also irritating to see that I could have doubled that by selling at any point later in the day. It took me a long time to get in the habit of setting a GTC for an exit point once I initiated a trade. This is just one of those times when I could have made more without it, but I just as easily could have woke up and found that with a GTC you could have covered in overnight trading but missed it. So you take the good with the bad. I set my exit point where I was willing to exit so can't cry later that you could have got more.


  1. How much is a point worth on the 129 call that you sold? Also what does one contract represent?

  2. Each point on a ZB futures option is worth $1,000 and one option contract represents one contract of the underlying. So if assigned I would end up with a short interest in the ZBH1 at a cost basis of 129'00. The interesting thing on these is that the underlying bond future minimum tick is 1/32, which is $1000/32 = $31.25. The minimum tick on their options is 1/64. The other odd thing is that your trade goes through based on fractions but your cost basis shows up as decimals. So when I went short at 127'20 it showed up as a cost basis of 127.625.

  3. I exited this trade at my GTC price of 126'04 for a $2,000 profit. The original post has been updated with a chart. I'm still short a 129 and 130 call for Dec, but looking to short the underlying again if I get a chance.

  4. On Friday I closed out the short 129 and 130 ZB call options. At the time I closed they still had 21 days to expiration but I was able to lock in 80% and 90% respectively so I felt it was prudent to take those gains and move on. I'm still looking to short ZB on any up moves and its possible I will short these same strike calls again during the next 21 days.