US 30 Year T- Bonds have been slowly drifting lower as the idea that the FOMC is going to lower rates continues to lose steam. Continued economic data shows that inflation fears continue to loom large and that has the Feds’ hands somewhat tied with regard to any rate cuts in the near future. Couple the data with the fact that most other countries around the world continue to raise their interest rates, and you have the makings of a falling bond market.
Recently bonds have taken out a critical support level at 112 and that has now opened the door to a retracement back to the lows from October 2006 at 110. Using a butterfly for this trade gives us the ability to position ourselves short an in the money put while limiting risk to the premium paid for the spread. It also gives us a very large profit range of 3 full basis points in T-Bonds.
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Buy one February 2007 US 30 Year T- Bond 112 put and at the same time, buy one February 2007 US 30 Year T- Bond 108 put, while selling two February 2007 US 30 Year T- Bond 110 puts for a combined cost and risk of 32 ticks($500) or less to open a position.
Max profit, assuming a 32 tick fill, is 96 ticks ($1500) and occurs with February 2007 US 30 Year T- Bond trading at 110 at expiration. Break even points are 111-15 and 108-15 which means we have a band of 3 full basis points or 96 T-Bond ticks in which the trade can be profitable.
Max risk, before commissions and fees, and assuming a 32 tick fill, is $500. This occurs at expiration with March 2007 US 30 Year T- Bond trading below 108 or above 112.
Odom & Frey
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