/ZNZ5 short strangle

Today I opened my first 10 year treasury bond short strangle (/ZN). I don’t have much experience with this instrument as of yet, so I’m basically jumping in head first. That’s how you learn quickly, right?

I have gathered my findings in my treasuries trading guide, and will update it constantly, as I learn new things about this market.

The details of this trade are as follows:

This is a high probability trade with low deltas, so I had to sell 4 batches contracts on each side, to make it worth it. Even like this, the initial margin is just $3,033. The bad part is that I needed to sell 8 contracts, which increased commissions.

Trade reasoning

/ZN has been in a very nice range for quite a while, basically over a year.

The FED’s possible raising of interest rates in September might cause yields to increase a bit, which would lower the value of the T-bond futures, but that shouldn’t have that dramatic of an effect.

What is more interesting to watch, is the general state of the market. It sort of feels like the market is ready for a larger correction, which would cause yields to decrease significantly. If this does happen, I think it’ll be short lived, but it’s worth being ready for such a scenario as well.

I’ve set alerts in Think Or Swim to alert me if the price starts nearing any of my options, let’s wait and see.

Since this is my first short strangle in treasury bonds, I decided to play things safe:

My deltas are below 10%, which do increase the potential profit, but I’d rather be on the safe side.

I’ve only trader oil and natural gas with short strangles so far, and I’m used to having huge profit zones, sometimes up to 40%.

With /ZN, I have a 6% profit zone.

It takes getting used to, that’s for sure 🙂

Let’s see how things play out.

Update #1: 09/08/2015

Despite the extreme volatility, flash crash, and major selling of US treasuries by the Chinese, the short strangle is super strong.

I was thinking about closing it off, and pocket $312.5 minus commissions, 71% of the max profit. However, with this trade, you really need to factor in commissions. The commissions with this trade are pretty high. TD Ameritrade charges a bit above $3 per options on futures contract for /ZN, and my strangle already has 8 contracts. If I were to close it now, I would be left with a net profit of $312.50 – (3*16) = $263.38, which is actually only 60% of the max profit.

I decided against this though, for a few reasons.

1. The profit left after commissions.
2. The average delta of the position is neutral. It has moved up and down since I opened the trade, but has returned here.
3. The super strong market movements haven’t caused that strong volatility in treasury bonds.
4. The September Fed meeting is on the 18th of the month. Even if they decide to lift off and increase rates by 25 basis points from the present 0%, yields won’t climb that much, as to put my strangle in danger.
5. The deltas of the individual legs are at 2%, so that means that there is a 2% chance of reaching either till the expiration of the options contracts. Very unlikely.

So I’m not taking any action right now. I don’t want to narrow the strangle either, since we are in a volatile market, and the Fed meeting is coming up, but I still want to pocket 100% of the premium.

By the way, during the volatile weeks passed, the upper leg of the strangle was worth 0″11… I originally sold it for 0″04. I was thinking of adding to the position when I saw that, since the prices of the treasuries didn’t move that much, but chickened out, since everything was so volatile.Maybe next time.

We’ll see how things progress from here.

Trade summary – Profit of $437.50

The trade expired OTM on both legs, bringing in the maximum profit it could. Nice trade, and good call not closing it ahead of time.

My next /ZN short strangle is already open, it should perform well also.