We recommended a bond trade on February 8 which did not work out so well. This was right at the point where the bonds really fell off the edge of a cliff as bonds dropped into a yearly cycle low. Today, the bond is the most oversold it has been in the past 20 years. Bonds have also formed a swing low this morning.
Weekly stochastics and RSI indicators also very oversold.
This chart shows that the 21 DMA is at the bottom 1.7% in history.
The optimism index has been imbedded in the oversold level now for months.
The trading strategies we usually recommend are not working well right now. Things were difficult leading up to the election and I really thought regardless of the outcome things would get easier. They just have not.
The success of our trading system is the ability to limit risk with stops while letting a good trade go. The volatility means we can never set a stop that will work. There is something else we can try. I am not an options guy. I seldom recommend them but I think in the right circumstances they can work.
80% of all options expire worthless. The one time options buyers have an edge is at Intermediate cycle lows. Some ICL's are not that obvious but the destruction in the bond market is not a daily cycle low. Bonds are clearly finding an ICL right now. This is a time when you can make a LOT of money buying options.
One reason I don't like options is all the moving parts that determine what the value of an option is. The primary 3 variables are the intrinsic value, time and volatility. There is not a volatility index per say for bond options like there is for stocks, but believe it or not the volatility in the stock market is considered low according to the VIX. This means that the cost of options is "not expensive."
Below is a stack chart with the top row being the June 30 Year Bond and the June 10 Year bond. The bottom charts show the corresponding options you can buy There is not yet enough volume to create a smooth chart but I want you to get an idea of how these move. Of course, bonds have been dropping all year so the options would naturally drop, but the magnitude of the drop can change wildly due to all the variables (moving parts) that I mentioned earlier. If the bonds turn higher, I would expect similar moves in the opposite direction. Throw in a spike in volatility and you can make 100% in a few days. The pink lines correspond the trading day on the bond with the trading day on the option.
The bond market seems so damaged it is difficult to guess how high the bonds could go and likewise the value of the calls.
Here is how this would work. I would recommend that you buy the June 30 or 10 year bond. At the bottom are the corresponding charts with highlighted target areas.
Obviously between the two, the 30 year looks to have more value than does the 10 year.
The bonds could reverse at any moment. If you take this trade and it takes one more leg lower like a lot of trades seem to, you will not be met by any margin calls, making this an easy trade to hold onto. We will not use stops with the options. Options are kind of an all or nothing bet. if something suddenly happened we could jump out quickly but expect to lose a majority of your premium.
As a side note, there is a possibility that the Fed could begin buying bonds as a way to stop the hike of interest rates. They will call this YCC for Yield Curve Control. You can read more about this here. https://www.bankrate.com/banking/federal-reserve/what-is-yield-curve-control/#:~:text=Yield%20curve%20control%20would%20provide,set%20by%20the%20Fed%20low.&text=The%20unconventional%20tool%20would%20also,low-rate%20promises%20into%20practice
And there is always just buying the board like we usually recommend.
The margin on the 30 year bond is still $4400. We recommend buying the June 30 year bond with an entry limit order at 155'16 and a stop at 153'16 which is risking 2 points, or $2000. The ICL trend line is near our target of 166 which is 10.5. points away from our entry point. Each point on the bond is worth $1000, so you are risking $2000 for the opportunity to make $10,000..... good for a 5X1 risk reward ratio.
Recommended entry or exit prices may not necessarily be reflected on the track record. Markets can change quickly resulting in stops being moved or profit levels changed based on new information. Brokerage customers are the recipients of these potential price adjustments made after initial recommendations.