/ZNZ5 November short strangle

I just opened another 10 year treasury short strangle. My previous one, which will expire this Friday, was very successful. I’ve been keeping track of the treasuries market ever since, and I feel like I’m getting to know this instrument as well. I have gathered my findings in my treasuries trading guide, in case you want to learn more about it.

The details of this trade are as follows:

Date Inst. Mark. # L/S Strike C/P Price Δ Days Max profit Comm. Close P/L
1 9/21/2015 /ZNZ5
127’170 5 short 124.5 P 0″04 .08 32 $703.13 $15.35 pending pending
5 short 130.5 C 0″05 .08 $15.35
2 10/02/2015 /ZNZ5
129’290 5 long to close 124.5 P 0″02 .02 $15.35 -$1,171
5 long to close 130.5 C 0″22 .31 $15.35

I opened 5 contracts on each side, making for an initial margin requirement of about $4,100. I am keeping it safe with the lower than 0.10 deltas on each side, making this a high probability trade. Because of the large number of contracts (10 in total for this strangle), the commission is pretty high, $30.70. I’m going to have to talk to TD Ameritrade about this later this year, once they see that I’m an active trader. It seems they can be bargained with, as described on optionalpha.

Trade reasoning

/ZN has continued to move in a very nice range for quite a while, despite the flash crash in late August, and the excitement around the FED meeting. It’s sort of shocking actually, to see it still in it’s range.


The last time it moved out of it’s range a bit was in June, when the world was worried about Greece and a possible contagion into the EU economy. But it quickly bounced back. The market of late has been interesting, in that there has been a lot of excitement over specific things (Greece, flash crash, China, Fed), but it all dies off very quickly, and things go on as before. This is what I can see in the price action of /ZN as well.

I wanted to keep on continuing to take advantage of this short strangle possibility. The price is smack in the middle of it’s trading range, and the expiration is only a month away. The next Fed meeting will be on October 27-28, so just after the options expire, meaning the outcome of the Fed meeting won’t have an effect on the treasuries. Of course, anticipation moves might happen, as they did before last Thursday’s Fed meeting.

The IV is up a bit today, so it was a good time to write the short strangle.


I got a good price for the options as well. The market spread for the call side was .04-.06, but I entered a .05 limit order, and it filled nicely.


The only thing weird about using treasuries for short strangles is the profit range. With my last oil short strangle, I had a 50% profit range. With this /ZN trade, I have a 4.5% profit range 🙂 Of course, this doesn’t matter at all, the market has priced everything suitably, it’s just weird to see this risk profile, after getting used to something else.


And now the waiting game begins, let’s let my good old friend Theta do his thing.

Update #1: 09/30/2015

Equity markets have been taking a real beating, almost at their August lows. As a result, treasuries are higher, with investors fleeing to safety. Even today, there is an equities market bounce, but treasuries are not following.

The market price of ZN is 128’175 at the moment, so it’s still a way off from my call strike price of 130’160.

While I don’t believe the market has much further to go on the downside, I was just looking at the number of how I could adjust this position, in case I need to make a move.

My adjustment strategy of choice is to shift the entire strangle, so sell buy back all the options, and sell them again at a higher price. This always results in a net debit, lowering the maximum profit on the trade. The thing is that since the initial price of the put leg was just 0″04, it doesn’t really have further to fall, to offset the increase of the call leg. This means that I can’t really wait much longer before adjusting the position, otherwise my maximum profit will be reduced by a lot.

Of course, I can make my strangle narrower, but I don’t want to take that risk in this market environment, things are too choppy. I will have to swallow the lower maximum profit, or possibly increase my position size, to offset it. This depends on the extra margin requirement, and whether my account can handle it.

My option buying power presently is at 50%, which is the minimum I feel comfortable with. Another position might expire till then, so this might be an option though.

Let’s see how things progress from here.

Update #2: 10/02/2015 – Close at -$1,171

Oh wow. My position got absolutely annihilated this morning at 8:30, I had to close it with a huge loss.

The position went bad on release of this months non farm payroll numbers, which was WAY below expectations. Expectations were for job additions of around 200K, and instead, it came out at 145K, with downward revisions for July and August.

This is what happened afterwards on the minute chart.


The delta of the upper leg shot up to 0.31, and there was nothing I could do.

  • I couldn’t narrow the strangle and keep an acceptable profit zone, without burning in the loss.
  • I didn’t want to go long the futures contract, since the move up was so quick, I didn’t know whether it would continue or not.

Did I panic?

You could say so.

That huge jump, plus going to -$1000 all the sudden from +$200 freaked me out, given the importance of the non-farm payrolls report, and the general mood of the market.

The lessons I learned:

  • When the market is freaking out as is, either don’t be in a position that can be severely affected, or be hedged as hell. I was thinking of placing stop buy and sell orders, in case the market jumped, but didn’t.
    I could have closed the position this morning before the release of the data, and I was thinking about it. The reason I didn’t, was that expectations were so high.
  • I was long on the XIV, in a nice profit, and I thought I had entered a trailing order, which would have closed with a nice profit. I made a huge mistake though. It was still before regular market open, in extended early trading, and my order didn’t go through, because it was set to fill only during normal trading hours.

This is my first big loss with short strangles, and it holds lots of lessons for me.

3 days later

I’ve been thinking about this loss non stop for the last few days. Of course, the price of ZN has gone back to the level it was at before the spike, so if I would have done nothing, I would be in the same position as I was before it.

But that’s not the point. The point is what could I have done, to manage the position, instead of panicking and closing it. Oh, and closing all the legs was stupid as well, I should have kept the winning leg open, to let it expire normally. It would have meant $100 extra.

Actually, closing it was the worst possible solution for a number of reasons. First, the price was really high (buy to close), because of the sudden movement. Second, I panicked. The reason I panicked was that I didn’t have experience with such a quick, sharp move against me in a short strangle. I lost my head, since I didn’t have enough time to analyze possible adjustments. The only thing I analyzed was moving the entire strangle over, but that would have burned in a minimum overall loss of around $500. When I saw that, I totally lost it. Heart pounding, cold sweat, everything you can imagine.

All I could think about was the limitless loss. But that was soooo stupid.

What should I have done? This:

Buy 2 ZN futures contract, with a firm stop loss set. My upper break even would have moved up to about 133. The long futures contract would have offset any losses due to the price rising, and the stop loss would have protected me in case the trend turned (as it did). I could probably have gotten away with an extra profit, but at maximum, a slight reduction of the maximum profit of the short strangle.


Of course, the fact that my XIV close went wrong didn’t help the situation, I was already tense because of that. By the time I was finished closing the XIV trade, all hell had already broken loose.


  1. When the market is super tense, it’s better not to be in a short strangle with an instrument, that can be affected by a scheduled news release.
  2. If you are in the trade already, make sure you watch the news releases. The market WILL react harshly, if it’s way off expectations.
  3. Be prepared with stop limit orders on the futures contract in both directions, to catch any big shifts as they happen. Don’t place the limit orders too close, since small swings always occur. Where to set it? It depends on the instrument. For ZN, it would be about 0.4% off. But for oil, it would be 3-4%. It depends.
  4. If all hell breaks loose, cover your position with the futures contract. Set a firm stop loss, or better yet, a trailing stop to protect any profits you accumulate.
  5. Once you have open futures contracts, you really have to keep an eye on things. It becomes intraday trading, a whole different game which I still need to learn.
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