Tuesday, February 15, 2011

Shorting ZB again

Below is the original trade post on 2/15, scroll down to "Trade Update" on 2/23.

After successfully shorting ZB numerous times during the recent 119-122 trading range, I wanted to take a break after it broke support near 119 to see how it acted. I had a rough target of 119'05 drawn that has historically been  major resistance over the last two years. And as you would expect it became support on the way down after the bond bubble burst. We've now stopped almost exactly on target three times over the last few days as it tests former support near 119. I'm still short 5 FEB ZB calls that expire on Friday so I can't get crazy with size here. But I am comfortable dipping a toe in and more than happy to short with larger size in the low 120's if we break 119 to the upside.

Though there are numerous forces pushing bond prices down in the medium and long run, there is also always short-term risk to the upside if equities finally roll over, the middle east comes unhinged, or any other random event that causes people to seek safety until they can figure out what's going on. That said, I expect the new range to be roughly 115-119 for a while and will trade accordingly. A look at the two year chart shows numerous support and resistance at these levels. The last time we broke 119 to the upside from below was the May 6 Flash Crash on our way to a Eurozone financial crisis that ultimately culminated in the bond bubble. So barring something significant new to the equation, I'm comfortably shorting near 119 until proven otherwise. If we break 119 in a significant or sustained way without new news, then I will have to admit my trading idea is wrong and then reevaluate.

5-Day Chart with entry point

3-Month Chart showing recent 119-122 range and maybe new resistance at 119

2-Year Chart (Multiple Technical Analysis points of reference here to trade from)

Trade Update 2/23/11:
Unfortunately I've taken my first loss on trading bonds. The basic technical analysis I've used and served me so well since October was trumped by geopolitics. The bond bubble and rising international interest rate story didn't disappear, but it is understandably being temporarily trumped by uncertainty. And to be fair bonds were oversold so a bounce isn't surprising. I can also argue that I didn't wait for confirmation of rejection at the 119 level and chose to dip a toe in early with one contract. A second error I made on this trade was assuming/wishing that I would be out of it by the time I had to roll the futures contract. In the last four months of trading bonds my average holding period was less than 3 days, so with 8 trading days left on the MAR contract at the time of trade initiation I wasn't worried about having to roll. Well that turned out to be a trade changer for me because the new front month contract (JUN) is 1'16 points lower than (MAR). At initiation I was more than happy to add to my short position on this trade, that's why my initial size was just one contract, but I'm not interested in adding to it at the current price of the front month contract. So what I did do was roll the one contract and sell some OTM calls at the 122 strike. So some lessons learned here but the bottom line is I booked a loss of ($2400) on the MAR contract and I'm now short the JUN at 119'24. If the new front month contract was similar than I would just consider this a roll out and only paying a few bucks in commissions to do so, but because of the price disparity this has to be viewed as one losing trade and initiation of another.

Trade entry and exit

 Prices of MAR and JUN contracts when I had to roll to the next month

1 comment: