Treasury and Euro Short-Term Trading Strategies
by Carol Hurley
There are some important events this week for financial market participants, namely interest rate policy meetings both in the U.S. and in the Eurozone, and U.S. Treasury auctions. I’d like to offer a few short-term trading ideas for the Treasury and euro currency markets.
The Treasury market perhaps hasn’t been as exciting as crude oil or grains this year, but it has offered a slightly less nerve-wracking degree of volatility, with margins that are relatively inexpensive for smaller investors (currently under $2,000, subject to change).
On Wednesday, August 6, the Treasury plans to auction some $17 billion in 10-year notes, followed by $10 billion in 30-year bonds on Thursday, August 7. There is talk the auction calendar may be expanded (the 10-year quarterly auction could become a monthly event), so we could see greater supply coming into the market. The Treasury is dealing with a widening budget deficit and has a lot of bills to pay, so it needs to sell Treasury instruments.
Looking at the September 10-year note futures, the range of 113-115 is where the market has spent a lot of time, and I think it remains reasonable. September options have less than 20 days left to expiration, but since volatility has been low, the options are relatively inexpensive. If you’d like to take a position with the idea of increasing supply, consider buying the September 113.50 put, which would cost roughly $300, not including commissions.
If you want a more neutral trade as you think there could be a breakout but aren’t sure which direction, you can buy the 113.50 put for $300, and also the 116 call for about $300. This might be a good strategy to consider in case of some type of surprise announcement from the Federal Reserve at the conclusion of this afternoon’s Federal Open Market Committee meeting. There is little expectation that the Fed will change interest rates at this meeting, and I see it as largely a non-event. CME Group Fed fund futures imply odds of 95 percent that the Fed funds rate will be kept steady at 2 percent. However, it’s likely the Fed may make some statements about inflation, and offer hints of possible future actions.
Euro
If you are a little more aggressive and willing to shoulder a little more risk, the euro currency has been in a big trading range and is worth considering for a trade. The European Central Bank is due to announce their interest rate decision Thursday, August 7. Rates there are likewise expected to stay steady (at 4.25 percent for the key short-term rate), and I don’t see the euro moving above $1.60. I like selling premium in this market, and would recommend selling the September $1.60 calls. These cost roughly $375 (at the time of this writing), not including your commissions. If the market drops, or goes sideways, you are waiting for time decay to take in as much premium as possible. If it ends up in-the-money, you’d be assigned a short position at $1.60. You can risk a move to $1.5700 in the September euro currency futures to exit your option. Or, if you are willing to be assigned a short futures contract at $1.60 on expiration day should the option close in the money, you can either place a stop at $1.6065 in the futures market or exit the option at the market if the euro gets there before expiration.
The August euro options expire in just a few days, and you could also consider selling the $1.5650 calls for a quick trade. If the market is below that level at expiration, you keep the premium. If the market trades above $1.5650, exit the option at the market. Keep in mind, unlike buying options, selling options involves unlimited risk. I encourage you to work with a professional in formulating these types of strategies.
Please feel free to call me with any questions you might have about strategies in these or other markets. I follow a variety of markets for clients, and will tailor a strategy for your particular account size and risk tolerance.
Carol Hurley is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. She can be reached at 866-790-4371 or via email at churley@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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