Monday, January 3, 2011

Bond Volatility Still Paying Off

I was kind of unpleasantly surprised to see that a GTC order to short ZB at 122'00 was hit in the closing minutes of trading last Friday. Even though from a technical analysis point of entry I was OK with it obviously, as that is where I had set my order, I was uncomfortable with why bonds ran so big on the day when equities were flat and I couldn't find any news to justify the move. So this was a case of a GTC order benefiting me as if I were watching live I don't know that I would have pulled the trigger.

So over the weekend I reached another point of psychological trader breakthrough. I've been playing ZB short for a few months now and doing well, but I've been a little conservative and targeting exit points based on a desired dollar gain and not the chart. This makes littles sense as I was using the charts for entry points but ignoring them for exit points. So looking at the chart below I made a note to myself that 120'16 looked like the logical exit point, this would be a $1500 gain and normally I would target $1000 no matter where that happened to be on the chart. So I set my GTC there and woke up this morning to find it was hit. Most of the action took place in the electronic session. I entered the trade with 5 minutes to go on pit trading Friday, and was taken out of the trade within a few minutes of pit trading this morning. This is another case where had I been watching I'm pretty sure I would have pulled the trigger to exit earlier. I realize I need to get to the point where I can make the right decision whether I'm watching or not, but baby steps, I am actually making strides I'm happy about.
However, as happy as I am to start the year out right, I actually missed another shorting opportunity this morning at 122'00 again. That was actually the high tick so there is no guarantee my order would have been filled there. I'm still short (2) JAN 123 calls but I will look to get short the underlying again if my entry point is hit. Below are some other charts that show the trend I've been playing. I posted last week that I felt we were possibly in a consolidation phase for bonds after a pretty big sell off, so far the 1-month chart looks to be playing out this way and I've profited accordingly as we fluctuate between 118'16 and 123. Long-term I still think the 30-year yield goes back to north of 5%, that means there is still some good money to be made being short bonds. (I've actually got a second post coming about anticipated prices for ZB based on futures yields). But short-term, volatility in bonds is still present and there are so many possible catalysts that I'm going to be cautious and wait for entry points and use a combination of short calls and short futures contracts. The big move down has most likely already happened so I'm going to keep my short positions small until/unless we get a move above the down-trending channel. The hard part will be to have the courage to short when/if we get a geopolitical event that temporarily drives people back to the safety of bonds. I've got several possible known catalysts for this to occur, we'll see how I feel when/if they happen.

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