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Posted January 18, 2005

Buy Treasury Bonds

My feeling is the Treasury Bond market is on the verge of accelerating dramatically into new highs. They have continued to trade firmly regardless of all the bearish sentiment the analytic community keeps throwing at them. I have seen this before; Bonds making slightly new highs and nobody seeming to care. My 25 year experience is....Bonds only quit a bull move when everybody and his brother starts screaming, "You gotta buy them!!!", which is not even remotely the case now.....

With Bonds poised as they are, I think they are just one "positive" piece of news away from busting out on a 4-6 point run (to begin with), like perhaps with tomorrow's Consumer Price Index release at 8:30 AM EST. Furthermore, if I am wrong, and they reject new highs here, I see them falling very quickly 3-4 points. To me then, this is the perfect scenario for owning the following "unit":

Buy 2 April 114 calls @$1315 each = $2630
Buy 1 April 113 put@ $1659 each   = $1659
Total cost                                        $4289

When it comes to dollars, the chart below is my best way to display the idea. Even when Bonds are going nowhere, 3 and 4 point swings are common (check out the last 4 months for example). Before the April options expire in 65 days, I believe Bonds are either coming out of here to the upside in a big way, or, they will crack and try to take out the last four month's lows. If either of these cases does take place, it will have been the perfect setup for the position recommended, i.e., either a strong gain, or a very real shot at recouping 100% of what you have on the table....I should also point out if June bonds are between 113 and 114 at expiration, you could lose everything you have in the position.

I will make this a formal recommendation, and will use tomorrow's opening price in both of these options as my official entry points. (Added 1/19/05 Bought one unit of 2 April 114 Treasury Bond Calls @ 1 29/64 and 1 April 113 Treasury Bond Put @ 1 30/64)

If you are interested in this idea, I would suggest contacting me early tomorrow morning and have at least part of your position established before CPI comes out at 8:30 AM EST. The Treasury Bond pit opens at 8:20 AM. Give me a call if you want to talk about it.

Bill Rhyne


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