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Bonds have already retraced 1/3 of the way from their extreme low
of this year around 106 to the extreme high around 117. Going the
range is nothing new for this market. It went almost that entire
range from 11/96 to 4/97.
The *real* question is not what you think bonds are going to do
but how you intend to structure a trade to capitalize on it.
Selling a neutral position and then managing adjustments and hedges
to protect it is what I've been doing. I start by selling a strangle.
I try and pick a good day to trade directionally away from an extreme.
In this case, I sold the 118 calls above the most recent high when I
saw a weekly reversal which also made a Connors-Hayward Undeniable.
At the first point I would normally exit or hedge, I sell the other
side of the strangle. This brings me to delta neutral. I then do
nothing unless I 1) have a large unexpected move against which I must
hedge; 2) price moves too close to me and I must roll out; or 3) I see
a great directional signal and want to trade it.
It's then possible to use either the futures or the options on either
side to implement the trade. It's a matter of how fast I want action
and how much I want to expand my position and its margin requirements.
When I'm uncertain or the market is just chopping around I stay neutral.
To minimize risk, I look to reduce the futures margin requirement number
in the Opvion Vue IV to the lowest possible number. This means from
time to time I may sell more options or recover a few that are outstanding,
or I may use the futures to do the same. All the time I am managing this
I try to keep losses in any hedges to an absolute minimum. If I hedge
with the futures for example and the hedge makes money while the neutral
part goes off center and it looks like a false breakout or a retracement
is imminent, I trade just the hedge very defensively, making sure I don't
close it with a loss. Sometimes this is not possible, but I try.
The idea is that you're making money daily based on your premium even
if you don't see a good trade. When you do see a good trade, you're either
trading outright (setting delta nonzero intentionally) or hedging
and looking to keep the hedge from costing you (going to keep delta
neutral while not losing). I watch the greeks to try and minimize the
undesirable aspects and maximize the desirable ones.
I'd sure be interested in hearing from any other traders who engage in
this kind of thing. I've not had much opportunity to discuss it with
any others and it would sure be interesting to hear what the RT is
doing on this. It seems the bonds are a unique market for this kind
of trading. I have not been successful to the same extent in any
other markets.
Phil in Cupertino, CA
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Please note the new email address below:
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Dan Walo wrote:
>
> Steve Briese of "Bullish Review" has made the following evaluation of
> the bond market based on the latest commitment of traders report :
>
> "The bond market has pending disaster written all over it...Those who
> missed the initial plunge have not missed the the big move yet."
>
> Any comments from sym / Elliott wavers, OEX mavens etc. ???
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