Excell with Options: Three Charts That Tell the Story of the Treasury Market

Putting the ideas together, it is now time to turn to the QuikStrike Spreadbuilder and put together an options trade. Directionally, the trade should be bearish because many factors are pointing to higher yields: 1. Yield curve steepness 2. Higher global bond yields 3. Treasury issuance 4. Technical move to the trendline 5. Futures break lower out of a consolidation pattern. While it is not entirely clear this will be a high volatility move, given implied volatility is at the lowest levels in the last three years and there is no bias in options skew, I should not be afraid to spend some premium. Finally, it is worth looking at Weekly options because they have just set a new record in average daily open interest of over 1M contracts. In this example, I chose the TN5F6 contract to give me more time for the idea to play out, but a trader can choose any expiration and use a similar idea. The option trade is a split strike put butterfly buying the 114.75 puts, selling two of the 114 puts and buying the 113.50 puts. The strikes are not asymmetric, so if the move continues to the downside, traders will still make some profit, albeit smaller, but doubling their money. The maximum profit occurs if futures move lower over the next few weeks and stop at the 114 strike. This would net almost a 4 to 1 gain on the premium spent. The risk for traders is futures sit or move higher, not moving below the 114.75 level in which case they would lose the premium paid.

With futures contracts that allow traders to pinpoint the 10-year part of the curve and liquid Weekly options contracts that provide the flexibility to customize a view, traders can benefit in looking at the Ultra 10-Year Treasury Note contracts at CME Group.

Good luck trading!