The recent Treasury rally was quickly reversed as stocks managed to find support. Once again, bonds and notes are wrestling with the impact of supply and economic turmoil. In recent months, supply has been the dominate story but it is uncertain as to whether that can continue to be the case.
We have been noting seasonal strength and the possibility of a sizable rally. However, time appears to be running short for this prediction to play out. Beginning in mid-March seasonal tendencies shift from bullish to bearish.
Treasury futures have spent the majority of the previous weeks trading in a painfully tight range. In more normal environments, this would be a great time to be an strangle buyer as one would expect option premium to be cheaply priced. However, this isn’t the case. Option premium is still overly inflated in the aftermath of the 2008 fall rally. Option buyers that reaped the rewards of being long volatility seem to be buying options looking for a repeat and those that were devastatingly short volatility may have cut back on their trading. Accordingly, options seem to be unjustifiably high. Such premiums may work in favor of the option seller in the near term, and those that have been short “vol” lately are likely doing well. Nonetheless, I can’t help but wonder if another market shake up ! is coming. In the past, this type of range bound trading has been indicative of the calm before the storm.
That said, I would love to have the opportunity to recommend selling premium in this market. Unfortunately, the deflating volatility has prevented me from doing so as my models aren’t supporting the premise. Should the selling continue to major support levels, I will be looking for short put opportunities. Should we see a rally to resistance areas I will be an advocate of selling calls. However, at current prices I can’t justify doing either.
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