Frustrating Week: I Took Some Losses but Learned Some Lessons

E-mail: JasonAndrewHaas@aol.com



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ZB Update

I was short weekly calls on ZB that expired last Thursday before Easter at the 120, 121, and 122 strikes. The 121/122 expired worthless but I chose to not buy back the 120 at a loss and rather inherited a short position at a cost average of 120'14. Even though I had previously stated I was going from bearish to neutral on ZB, I was willing to stay short this one contract until/unless we broke to a new high. We had been in a tight one-point range for the last four days but broke above it in after hours today so I took the loss for (-$1125). In retrospect, it's interesting that last week in my post I said my gut tells me we're going to 122 so I wasn't looking to get short until then, but yet I wasn't the least bit interested in playing it from the long side up until that point. That tells my own biases were a little stronger than common sense. Also mentioned in that previous post, I have followed through and entered some OCO orders to get short at 122 with a tight stop.

I'm not about to predict what, if any, new information comes from the FED on Wednesday, and therefore won't try to predict how the market might react. I'm kind of in a wait and see mode right now for an indefinite period and it could be that I'm done with bonds for now, we'll see. It's been a good four months trading around ZB so I need to make sure I don't give back my profits, just need to be patient and only enter new trades for the right reason if it presents itself.

Closed for a loss when we broke 121'18 (-$1125)

Going from bearish to neutral on bonds (ZB)

Long before I ever subscribed to technical analysis I got by for many years on instinct, intuition, The Force, whatever you want to call it. I've been playing ZB for four months now using TA around the fundamental forces behind the interest rate/inflation story. Last week I closed out of some short ZB and felt like I was at a reset moment. I was still short some OTM calls that didn't expire for two weeks but at the time they were a full 3'00 OTM and I wasn't ready to close out early yet, other than those I was ready to reset. I've been watching the ZB chart like I watch TV for a while now and all I can tell you is that my gut instinct says something has changed. I got short one contract on Friday simply because we were up 3'00 in three days, that's good enough for me to take a short-term downside shot. But after watching the combination of price and volume after I entered  my trade I felt something has changed. In watching the BxA sizes I noticed that there was a larger bid under bonds than in the past, I normally don't pay attention to this but it was the first sign that something was different. I've been trading off the JUN contract chart ever since we rolled and not the aggregate chart. The trading range on these are different depending on what you're looking at. So the JUN contract ZBM1 that has been very technically sound told me to get short at 121, I did, but my gut said this wasn't holding. So I backed out to the aggregate chart and the top of the range there is really 122, but I don't feel comfortable with that either right now.


So adhering to what got me to the dance I listened to my gut an put in an order over the weekend to hopefully get out on Monday and I got lucky with this S&P announcement this morning that temporarily caused a 1'00 sell off. We spent the rest of the day today recouping that loss. So one of the major ratings agency does the previously unthinkable and publicly calls out the US on its debit/credit rating and the market shrugs it off after an hour? This confirms for me that at least temporarily there is a bid under bonds right now. As a trader I have to be willing to throw my bias over board and just listen to the market. In the past I've posted here that I'm willing to be short up to 5 contracts at 122'00 with no hedge because I would double down at 125'00, I'm changing that and now taking my short size down to 3 contracts at 122'00 and I'm going to use a stop, and if I add to this position it's probably going to be in the form of an OCO order where I scale in to shorts near 122 but have a tight stop. I absolutely still believe in the inflation/interest rate fundamentals long-term, but I'm trading for short-term profits, not investing with biases and waiting around long-term to hope it comes true.

ZBM1 JUN Contract: Trading Range 118-121

Aggregate Chart: Trading Range 118-122

 ZB Trade: Entered Friday, exited this morning

The probable OCO order that I'll use when we hit 122. I'm willing to risk a quarter point (0'08 to make 3'00), so 12:1 risk/reward. I intend to stagger my OCO orders and not put them all in at the same prices. This way a spike trade past my stop loss doesn't exit all my positions. If these all get run and my stops are hit, I'll use this same trade strategy but with a larger size as we approach 125. That is where I'm willing to stay short longer term and absorb the pain of being wrong.

Took my last profits on short ZB position, I miss my babies already!

I was conflicted yesterday about taking profits at 119'00. I've had a GTC order in to cover 2 contracts at 118'16 for several weeks. But like I mentioned in yesterday's post, I didn't want to watch profits evaporate as they had in the past so I felt I needed to take some of them. Well sure enough a few hours later my last short contract gets covered at my target price which means I left another $500 on the table from yesterday's close out. But looking at the chart, if 118'14 turns out to be a tradeable low, then I will be happy I got out. What if that low was 118'17 and thus I didn't get out of my trades for being stubborn on price at 118'16? That's the battle I still struggle with, when to override your game plan. It's easy to look at a chart later and say should've, could've, would've. So while it sucks to wake up and realize you probably flushed $500 by not being patient, what I have to remember is I felt it was the right move to make at the time and not second guess myself. Now comes the hard part, being patient and waiting for another good set up. I've got my alerts set up so I will evaluate the landscape when/if those are hit.

There is very little time premium left on my short calls, about $350 total. Essentially I'm out of the market right now. Notice Think or Swim's software is still messed up and showing something is ITM when it's not. I emailed them weeks ago and they assured me they knew about it and it would be taken care of soon. Makes you wonder how safe your money is with them, safety is an illusion anyway.

Taking some more profits on bonds (ZB)

We're down two full points 2'00 in the last 36 hours on ZB. That's kind of a big move and since we're already down from 123'07 to 118'22 in the last two weeks I need to lock in some profits here. The contract I just sold at 119'00 in after hours was shorted at 120'16 back on 3/10/11. I missed my desired exit point weeks ago by a few points and was upside down on that one by as much as ($2500) at one point, so don't want to repeat that performance. I need to concentrate less on calling tops and bottoms and more on taking large pieces of the middle. I've got one short contract left and still short some OTM calls that expire in two weeks. If we get another down move this week I'm probably closing those out early. This has been an incredible ride. I hesitate to close these out not knowing when/if I will get another attractive entry point. It feels like not wanting to go home after vacation is over.

(ZB) Adding to short position in 30-yr Treasuries

I was actually hoping the 30-yr bond auction today would be a dud and I could exit my short positions in the futures and the OTM calls. But it looks like the Middle East has put a temporary bid under bonds. Long-term I still think there are many headwinds for bonds to move higher, so as sickening as it feels sometimes to short against a spiking chart I did it anyway. I shorted at 120'16 and also sold a MAR3 weekly 121 call for 0'31. We're right at long-term resistance at 120'26, if we break that I'm going to have to take a wait and see attitude on adding any additional short exposure. I've got my buy to cover at the recent support near 118'16.

Also, something isn't quite right with today's action. Why was oil down? Perhaps that signals the move in bonds has less to do with the Middle East and more to do with the overall equities sell off. Whatever the reasons, I am comfortable with short exposure even if it moves against me in a big way as in time the bond situation will be resolved.

E-mail: JasonAndrewHaas@aol.com



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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

Taking profits in ZB

Staying true to yesterday's post IN THE MONEY TRADES: Managing ZB Position and closed out ZB today sooner than originally planned. I'm going to lighten my max exposure to 3 contracts from a previous of 5 until I see how things shake out. I'm willing to leave some potential profits on the board in exchange for peace of mind. I just entered with three shorts on Friday and by this morning I had already found myself watching the 1-minute bar charts where as I usually just watch the daily. I also set my alarm on Sunday to start watching at 3pm PST when the futures markets opened. That tells me I was too heavily invested in this trade from a psychological standpoint. So I'm happy to take some profits and lighten the risk exposure as well. I'm still short a FEB 122 Call and have orders to short the futures at 121'16 and 122. Update: Literally before I could even finish posting this trade my last order was filled to cover at 120'16. This also means I left $1,000 on the board from the (2) I closed out just 60 minutes ago at 121'00. That hurts, but again I found myself too heavily involved so I needed to step back and regroup.

Managing ZB Position

The events in the Middle East are potentially a game changer for trading ZB. For the last six weeks I've been methodically shorting at resistance and doing quite well. But this 119-122 consolidation range we've been in is the result of a sell off after bonds entered a short-term bubble. That bubble was predicated on fears of a double dip recession and financial institution instability in Europe which turned out to be short lived. Though I've been expecting to stay range bound with an eventual leg down, it is possible that new outside macro inputs will trump the technical picture. I have stayed true to my plan and scaled in to a maximum short position of 5 contracts http://inthemoneytrades.blogspot.com/2011/01/scaling-in-to-zb-shorts-as-planned.html#links. Below is the risk profile associated with what I previously believed was my worse case scenario. However, that was based on a continued consolidation range and slowly recovering world economies. If this Middle East thing turns in to a game changer then all bets are off.

As we learned many times in recent history from Long Term Capital Managment in 98', 9/11, and the 2008 Financial Crisis, all correlations go to 1.0 in the short-term. Take a look at Friday's 1-minute daily chart below of the ES and ZB on Friday. They are almost mirror images which is what you would expect. This is drastically different from their correlations over the last six weeks as the ES was slowly rising and ZB was tightly range bound. Here is why this is important to me, I might not wait until confirmation of a broken technical pattern to exit my ZB shorts for a loss. If we get a retracement of the equity market losses on Friday which also translates in to a reversal of ZB to the downside, I might exit my trades no matter where they are and head to the sidelines until further notice. Remember the May 6 Flash Crash was the harbinger of a much broader equity sell off over the next few months. I have zero idea what will happen going forward and won't even bother trying to predict, I'm simply going to be cautious and manage my risk as being short US Treasury futures and having unlimited risk is not where I want to be in a time of 1.0 correlations and Middle East instability. If the macro environment changes, then I need to be prepared to change as well.

Cashed Out ZB Trades

Today's FED announcement was just as planned, meaning rates are left unchanged and there wasn't any significant new language. Yet the bond market went nuts for 30 minutes after and traded in a full 1'00 range. I took the opportunity to close out the two short positions I put on yesterday. I captured 23/33 = 70% of the premium on the FEB1 Weekly in just 24 hours, with 9 days left until expiration that had to get closed out. I don't have the patience to wait 9 more days for another 10 ticks. And the short futures at 121'00 was automatically closed at 120'00 as that is where my GTC was set. As you can see from the picture below I have my orders set to scale back in to shorts at 121'00, 121'16, and 122'00. I might even double up on the 122'00 depending on what the action looks like at that time. I'm currently short one FEB 122 Call and still looking to scale in to a maximum short position of 5 contracts. Total take for these two trades is $1350.

Scaling in to ZB Shorts as planned

This morning I awoke to find my standing order to short ZB at 121'00 was triggered in the early hours. Unfortunately as the picture shows, my order to cover at 120'00 missed by two ticks. We then rallied almost two straight points in a few hours. That is a huge intra-day move for bonds. I am glad to see intra-day volatility still alive and I'm scaling in to a max short position of 5 contracts as planned. Beginning this week there are now weekly options available on ZB, so I dabbled in this a bit and sold the FEB1 123 strike call for '330 ($515). I've got a good-til-cancel order in to short another 2 contracts near the top of the trading range at 122'00 and if triggered this would leave me with short exposure to 5 contracts. I'm prepared to add to the short position if we break the range to the upside, but I would wait a while to see how it acts above 122'00, and what has changed in the macro environment to make the long bond yield head towards 4% again.

5-minute chart showing three entry points this week

Hourly chart of last few weeks entry/exit points

 Daily chart of 119-122 trading range

New Trade: Short ZB Calls

For anybody following my trades the last month in ZB this trade might seem counterintuitive as yesterday I shorted a call at the lower end of the 119-122 trading range. Here is my thinking: Shorting ZB for the last two months has been easy, nothing this good lasts forever and I've missed the last two entry points when I was out of town and chose to turn the markets off for a few days. The intra-day volatility has been amazing the last few weeks. Just using basic technical analysis and shorting near 122 has worked flawlessly and I've been paid several times http://bit.ly/fwdDFk, http://bit.ly/e3F3DH. Again, nothing is that easy and nothing this good lasts long. I'm concerned that volatility will dissipate, thus you have to wait longer to find entry points. Or worse, this thing breaks to the downside before it goes back up to test 122 and I get caught not having any short exposure. Since I'm willing to short up to 5 contracts at 122, I'm getting some short exposure here now by selling a FEB 122 Call for '520. That's $812 if it ends up expiring worthless. This way if volatility does die down or we break below the trading range, at least I get something before this gravy train ends and I'm forced to find my next meal.

ZB Chart Update

I've been using the charts to short ZB since November and so far doing fantastic with no losing trades. Today gave me some clarification on the chart patterns I've been watching so I wanted to share my thinking for those that are following. I was correct back in mid December that the closing lows below 119 were the end of the downward channel that started at the highs near 135. I thought we were in for some sideways action and have been placing my bets accordingly. After a few days it appeared we were in a rough range from 119-122. But without a lot of data points I feel charting is very subjective. Until it plays itself out I wasn't sure if we were truly in a sideways consolidation range or if we were looking at a rising wedge. The gold colored line in the chart below was my possible rising wedge to watch. Since this technical pattern tends to resolve itself to the upside, I have been hesitant with my short position size. It's also why I was using short calls at times instead of the underlying futures contract. In case this broke to the upside I wanted a higher cost average on my shorts. On Tuesday 1/18 we bounced two ticks shy of the support line on the wedge, but there is no rule that says the wedge has to fully form before we get a break in direction, so again I was cautious until we got some further data points. Today we broke through the wedge on the downside and bounced right at horizontal support. So going forward I'm prepared to scale in to shorts between 121-122, with my max short exposure at 5 contracts.

Below is an hourly chart and spread sheet that show my exact entry and exit points for the JAN operations expiration cycle. My total take for this month trading ZB was about $4280. You can look up my past trade posts by searching "ZB" in the search box at the upper left corner of the screen. If you're trading ZB as well or have any questions/comments please drop me a line. If you want to follow along for the FEB options expiration cycle then either bookmark this blog or the Twitter link provided as I copy all trade posts there. http://twitter.com/#!/JasonAndrewHaas

ZB Short Calls Close Out

This is a late post as I was out of town and didn't have Internet access when the trade was closed out. On Wednesday 1/12/11 I closed my short JAN 123 ZB Calls for '080 each. Entry points were 1'140 and 0'510, cost average of 1'010, profit is $1758. I closed these out for a combination of reasons. The first is I locked in 89% of the profit with 10 days left until expiration so the remaining risk (unlimited) wasn't worth the potential remaining reward ($250). The second is that if I've been right about this being in a consolidation range as I previously posted here http://inthemoneytrades.blogspot.com/2011/01/bond-volatility-still-paying-off.html#links, then it makes more sense to short the underlying rather than wait for these calls to completely expire. The gains I locked in today took 13 and 24 days respectively to accrue on the two short Calls. Had I shorted the underlying contract instead, those gains could have been had in hours as my timing on both turned out to be right.

Bond Trading Range Still Working

After covering my short trade at my target zone on Monday, I was a bit late to short again at the upper end of resistance near 122'00 just a few hours later. I ended up shorting again anyway at 121'20. But I was a bit uncomfortable with this for two reasons. The first is that I was upset with myself for missing my desired entry point, the second was this was beginning to feel too easy. I was afraid I was going back to the well too often and was about to get bit. Shorting bonds the last two months has been a great ride. So I decided to shorten my exit point a bit and stay small with only one contract because I wanted to see how the charts shake out the next few days.

 My theory of being in a consolidation range has been accurate the last few weeks, but today was the day we should find out if the down trending channel was still intact. Very interesting to see bonds rally all through the electronic session up to resistance only to see a large seller unload once the pits open and there is people to suck up volume. Two hours later somebody unloaded again. In the last two days I've gone from being uncomfortable being short to worried that future entry points might not exist as bonds are down 2 full points today. Such is the life of a discretionary trader. I'm still short (2) 123 strike calls but those are possibly a few minutes away from being closed out early at my target price of 0'14.

Three-Day chart showing last two trades within the consolidation range

Recent consolidation range from the lows on 12/15

3-month down trending channel with consolidation range

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.

New Trade: ZB

ZB was up to 122'00 earlier today and that represented a 3'00 move off the bottom from just three trading days ago.  Granted we had reached over sold levels and the move down the previous week was also extremely large. However, I just don't see a sustained move up in bond prices and I'm willing to get short if it does, so I sold the JAN11 123 for a little over a point. I would gladly get short at that level anyway so what this does for me is gives me a little pay day in case we don't actually get up there and thus giving me a chance to get short the underlying. I had some good fortune with timing on this as we ended up closing lower on the day and then going even lower in after hours. Since there is still 32 days until this option expires and as of the close I captured over 25% of the possible profit, any further move down will make this a candidate for early exit with an eye on shorting another option on future price increases.

Update 12/29/10: My buy to cover on the original short call was not triggered again today. I decided to short another 123 strike call based on the 2'00 up move today. I'm leaving the buy to cover on the first one at 0'14. With 23 days left to go I'm willing to leave something on the table in exchange for another shot at shorting again as it looks like we might be in a consolidation range now.

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.

Thank you Kim Jong IL

I was already short 30-year Treasuries but yesterday's Korea news opened up an opportunity to add to the position. My feeling was this, six months ago if you had told me that North Korea would engage in an attack on South Korea and people died, I would have guessed the markets would be down huge and fall from there. When we only opened down 150 Dow points and didn't sell off any further I didn't sense any real panic. Bonds however did show some panic and shot higher. With the combination of this news and some technicals I decided to add to my shorts in both the DEC and MAR contracts. This morning apparently a good jobs number trumps international conflict and the markets rebound and thus bonds sold off. I exited my shorts for a nice three day gain of roughly $3400. I am still short (1) MAR11 ZB 130 Call but will look to short MAR11 ZB futures again should the opportunity arise.