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September 20, 2012 / redman59

Playing Catch Up and Today’s Bond Trade

The last week or so has definitely been busy on a personal level leaving little time to monitor the market and look for trades.  I must say that I am also in no hurry to get aggressive either way.  Today I spent some time at the desk and one thing that I have been paying attention to as of late was the Dollar, Euro, and Bonds.  I have been waiting for the bounce in the Dollar and Bonds.  Today when looking at the $TLT, I decided to put on a trade to which I think will work and I am looking to pull an initial 20% gain out of the trade and raise stops on the position.  Looking at the chart below, I saw the following:

  • trend is now down marked by lower highs and lower lows
  • recent above average selling and below average buying in this bounce
  • relative strength moving average (purple line) is trending down with relative strength line below
  • downward sloping 12/20ema’s, 50sma, and a flat 200sma
  • yellow dotted lines mark Oct Iron Butterfly (113/120/120/127) breakevens

I am not expecting the trend in bonds to reverse any time soon.  With that I believe we will see stalling or reversion on any price expansion to the 200sma.  The dotted lines represent my breakevens and I believe this will capture a majority of the range as the upside b/e comes in around a resistance level and the downside b/e comes in at an area that should find buyers.  Also on extreme moves past these levels I will look to adjust the spreads by closing and rolling the spreads capturing profits.

This is one reason why I like these types of spreads as they are adjustable allowing the trader to stay with the trade.  It also doesn’t require a lot of monitoring as the gamma risk is mitigated and it allows an end of day trader to adjust to the trade without a lot of profit/loss volatility versus a naked long call or put position.  With my absence as of late and probable less than usual participation for a couple months, I chose to enter this trade versus other swing trades that would require more attention.

The trade is a Oct 113/120/120/127 Iron Butterfly (same as Iron Condor with sold strikes being the same) for a 3.75 credit, risk 3.25 per spread.  Below is the current risk graph at the end of today 9/20:

Now it’s time to catch up on emails, reading blog posts, and inputting spreadsheets.

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