Small bet on a tight range.

Shorting the 115 - 118 strangle @ 1'55

 

Premium collected: $1,859.37

Strategy: Need Sep. 10yr. futures to remain between 11306 (4% cash yld) and 11926 (3.12%)

Entire premium is kept if market settles above 11500 (3.75%) and below 11800 (3.36%) on 8/21/09. See Dial Below.

Yesterday, with the Sep. 10yr. future trading around 116'26.5/27 (cash yld. approx. 3.53%) a dealer sold 500 to 1,000 of the Sep. 115 - 118 strangles at a price of 1'55 which is 1,859.37 per strangle.This strategy is a bet that the 10yr. futures contract will not go below 115, actually with the premium being collected, prices could go as low as 11306. It is also a bet that prices will not go above 118, or more precisely 11926, when the premium is accounted for. Since there is risk in selling calls and puts the initial margin for this particular strategy is $3,077.00. Since the seller is collecting  $1859.37 the net margin would be 1,217.63 per strangle, maintenance margin should be 80% of that amount or 974.10. Typically we see a large fund manager come in and short strangles using various strikes trying to take as much premium out of the market as possible. Because of the size of these funds and their influence in the markets, not just futures but cash as well, often these trades can be quite successful. See http://financialfutures.typepad.com/kiss/2009/04/strangle-selling-in-us-treasury-10yr-options.html.

Again as of this writing 10:51 a.m.c.s.t. Tuesday July 7th, we have not seen an additions to the 115 - 118 strangle. In fact recently with futures trading 11630 area another dealer came in and bought the Sep. 116 - 118 strangle, paying 2'16 for it. Currently with futures trading 111631.5 the 115 - 118 strangle is quoted 1'57/1'59. Shorting the 115 - 118 strangle is profitable as long as the market does not settle below 11306 (which is just about 4% cash yield) or above 11926 (about 3.12% cash yield) on expiration day which is Aug. 21. We will be monitoring this sort of activity as well as other significant flows from our alerts. To upload them go to www.accutic.net.