Bonds have been rallying mostly based on the idea that the FOMC would be lowering interest rates later this year. I have been arguing with anyone that will listen that this is simply not possible. This weeks PPI data has really taken the wind out of those sails and we are slowly seeing the rest of the market acknowledge that. This data coincided with a triple top on the daily charts.
Bonds are poised for a fast and furious retracement to support just below 110 which is our target on this trade. This market will continue to churn within the already well established range for the rest of this year, and this trade positions us to ride this market from the top of the range back to the bottom of it.
Buy one January 2007 T-Bond 112 put and at the same time, sell one January 2007 110 put for a combined cost and risk of 30 points ($468.75) or less to open a position.
Max profit, assuming a 30 point fill, is 98 points ($1531.25) and occurs with March 2007 T-Bonds trading at or below 110.
Max risk, before commissions and fees, and assuming a 30 point fill, is $468.75. This occurs at expiration with March T-Bonds trading above112, break even at expiration is 111-17.
Odom & Frey
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