Market: 10-year note, ZN, $ZN_f
Buy or Sell?: We’ve been wrong about Treasuries thus far, but we can’t ignore the signs of what appears to be a market on the verge of a large short squeeze. Let’s buy cheap lottery ticket call options in the November 10-year note options!
Range: Notes are trading at the highest yields seen since the debt ceiling debacle in August of 2011. We see support looming near 124 in the September contract (122’22 in the December contract).
Buy November 127 Calls (August 22)
There are a lot of reasons to be bearish Treasuries, but it is possible that all of the sellers are already in and the longs are out. If so, the snap back rally can be swift.
Call options are cheap in Treasuries for obvious reasons, but things change fast. We think it makes sense to go long bullish volatility through the purchase of November 127 calls in the 10-year note.
This trade gives us about 60 days in the market with a total risk of about 14 ticks, or $220 before transaction costs. Because there is nearly 2 months to expiration, the option should hold it’s premium well in sideways trade; should we finally see a rally in notes this option could pick up value quickly. Last week it was trading over 30 ticks.
As always, there is unlimited risk in option selling.
Let us know if you would like us to place this trade for you, or you have questions.