Wednesday, September 17, 2014

TYZ; Pre-FOMC Candle Quick

The Federal Open Market Committee (FOMC ) is meeting right now in a second day of scheduled deliberations on monetary policy.  Following this meeting, a carefully crafted message will be presented that will attempt to describe the Fed’s goals, current conditions, the speed at which the gap between is closing.  Outside those meeting rooms, those who care about monetary policy generally try to guess what the Fed will say and how it will affect markets. Today, the overwhelming interest is on the touchstone phrase ‘considerable time’ which has been used by the Fed to describe the likely time after the Fed completes its bond buying program before it might considering lifting the fed funds policy rate above the zero-bound floor.
 I have argued that the Fed will leave ‘considerable time’ standing and should do so until a vast majority screams that the text is grossly inadequate in describing likely policy intent.  While some already do argue such, there is not a clear majority and the Fed should be expected to play cautiously on timing their moves away from aggressive accommodation.
 As such, we have looked at some bullish short dated options that would benefit from an a current overreaction to the possibility that the Fed leans heavily in their statement or that Chair Yellen waxes to hawkish in the post-meeting Q&A. 
TYZ 4 (Treasury 10 year Future) was a little stretched into Monday’s open, having fallen roughly 2 points since late August.  The contract formed a bullish ‘harami’ on Friday/Monday suggesting some reversal commencing.  Tuesday confirmed that reverse with a bullish inverted hammer that found settlement above the ‘mid’ of Friday, helping also to disqualify the bearish implications of the heavy selling session on Friday. 
 For guide, the Friday expiry TY options 125.5 126.5 call spread is quoted 1 bid / 2 offer.  

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