Straddle, Spread, Breakout - The Greenrush Capital Journal

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Drew Klein

Hey there Elite Traders,

This is a journal (excuse the innuendo'd name) for new and experienced traders alike. We will trade most every market – from Crude Oil all the way down to Rough Rice.

Our trading is focused on three areas as determined by duration:
1) Short-term strategies: Futures Breakouts
2) Medium-term strategies: Seasonal Futures Spreading
3) Long-term strategies: Option Straddles & Strangles

All trades that are to be considered will be posted along with a chart and short analysis. If you would like to know more details about the individual trade’s targets and stops, please PM or IM or email or call me.

A little background on me: My name is Drew Klein, I just turned 29 and I’ve been in the business since 2001 as a Series 3 broker, Series 30 branch manager, and now as a Principal and CTA. I have been mentored by two professional traders – a pioneer of the options markets and a thirty-year CBOT floor trader.
 
BREAKOUT: SELL AUSSIE DOLLAR

That may well be overly dramatic a title to suggest that we see a downdraft coming up in the Australian Dollar. But our charts are telling us that it may not be too far fetched. The Aussie was unflatteringly known as the ‘Pacific Peso’ in 2001, but has since staged a powerful rally from 50 cents/USD to almost 80 cents. Recent data from the Aussie Central Bank confirmed a slowdown in inflationary pressures and the market may begin to price in a halt in the recent rate hikes.

Combining our ‘dollar bullish’ scenario with this ‘head and shoulders’ technical formation, we anticipate a move down to the low 75 level in the next few weeks. Always use stops.

Trade Humble...
 

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STRADDLE - JULY WHEAT (Buy July 480 puts and calls)

The wheat markets made an explosive $2/bu move from Mid-August to Mid-October but have since settled down into a corrective and consolidative move. Implied Volatilites in the Chicago Wheat have reached relatively low levels which could indicate an opportunity to buy straddles out until July. With a major crop report out on Friday morning, I anticipate choppiness until then. Following the report, we think we could see some fireworks in all the grain markets as they come to grips with what farmers planting intentions.

The chart below shows July Wheat in BLUE and the 480 July Wheat straddle in RED. Note the sharp decrease in volatility - the selected straddle has fallen almost 50%.
 

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Good Morning..

Some very interesting moves in the currency markets of late(We trade mainly front month contracts on the Globex.)

The Aussie Dollar has moved higher over the last few days and accelerated after the the Reserve Bank of Australia said that unemployment was at it's lowest level in 30 years.

The ECB and the Bank of England today held rates steady, and the Pound is getting pounded, at one point down over 180 points from it's intraday high.

It should be noted that at the time of this writing, all 6 major currencies (Aussie, Loonie, Pound, Yen, Swissy, Euro) are trading below their 50 day Moving Averages, while the Dollar remains above the 50-day.

With the G7 meeting this weekend, we anticipate that volatility will continue to rise in the FX markets.

We remain cautiously bullish the US Dollar.
 
Worth watching is the NOB spread, buying 10 year notes/selling 30 year bonds. The chart below shows the 5x3 spread, as the locals trade it, though to keep commissions and margins down, you could trade is a 2x1.

The rule of thumb for the NOB spread is that it moves with yield and inversely to price.

The spread is consolidating in a triangle formation, and though our historical analysis says that we may move higher here, we will wait for further confirmation from the chart.

Always use stops.
 

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Quick update on the Aussie Dollar...
The currency markets have been volatile, and after 2 days or sharp declines in the AD, today we saw it rally again in our faces. Our stop has not been hit, and we maintain the position. Technically, not much has changed, though we should be aware that the Dollar is looking a bit tired and may challenge a daily trend line. All the 6 majors are still below their 50 day moving averages, and I would closely monitor the Loonie. over the next few hours to see if it pokes it's head above 86 cents.

In the next few hours, I will post an addendum to the Aussie Dollar short trade, as well as a few ideas in other markets.

Best trades to you...
 
Wheat prices have seen increased volatility over the last few days, and while the straddle we suggested HAS gained some value, the report last week didn't have the kind of effect we thought it would. Funds are incredibly long corn and beans as we head into the summer, so I believe we are in a good position in this trade to piggyback either a massive fund liquidation or a weather event. The next major grain report will come at the end of March.

Quote from Drew Klein:

STRADDLE - JULY WHEAT (Buy July 480 puts and calls)

The wheat markets made an explosive $2/bu move from Mid-August to Mid-October but have since settled down into a corrective and consolidative move. Implied Volatilites in the Chicago Wheat have reached relatively low levels which could indicate an opportunity to buy straddles out until July. With a major crop report out on Friday morning, I anticipate choppiness until then. Following the report, we think we could see some fireworks in all the grain markets as they come to grips with what farmers planting intentions.

The chart below shows July Wheat in BLUE and the 480 July Wheat straddle in RED. Note the sharp decrease in volatility - the selected straddle has fallen almost 50%.
More...
 
CURRENCY SPREAD - BUY MARCH CANADIAN DOLLAR, SELL MARCH AUSTRALIAN DOLLAR

Analysis
The first thing you should be aware of is that futures spreads, despite the reduced margins, are no less risky than outright positions. I like this spread because both the Loonie and the Aussie tend to trade very technically. While we anticipate the US Greenback to strengthen in the coming months, we project that the Australian Dollar will fall further and faster than the Canadian Dollar. More specifically, technical analysis is pointing to an inverted head and shoulders pattern (see chart below) and our desired risk for the spread is quite explicit.

Trade Details
Buy the March Canadian Dollar and Sell the March Australian Dollar between 775 and 790, premium to the buy side.
Margin required (may change) = $918/spread
Risk a close below 645 ($10/point)
 

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Today I wrote an article for Fastbreak Futuresource. You can download it below.

Quick Trade Update: The Dollar blew through the short-term trendline and 4 of the 6 majors (excluding the Swissy and the Yen) closed above their 50 day Moving Averages. Our Aussie Dollar trade managed to stick around, though it looks as though it may get taken out. We will stick it out and keep with our plan.
 
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