Trade Description
Buy one April 30yr T-Bond 110 put & buy one April 30yr T-Bond 112 call for a cost of approximately 24/64ths or $375 on Monday, March 21 on the close.  Margin and max risk is the cost of the trade.  Options expire Thursday, March 24th.   Please note April options trade off of June futures.  Also note that the strike prices may change as the trade is intended to strangle the price of the market.  For instance, if the market is around 110-00 then you would buy a 109 put and a 111 call.

Explanation
After several months of lackluster bond volatility the bond market has broken out of its range and offered several explosive moves over the past month plus.  This week is a great setup for short term volatility with PPI Tuesday morning and the FOMC announcement at 2:15pm eastern time.  The FOMC meeting is widely anticipated to offer the possibility of a statement change and whether they do or not is not nearly as important as the expectation that they will.  Wednesday is CPI, existing home sales and the energy reports and Thursday is a plethora of reports including durable goods, weekly jobless claims and new home sales.  Overall a big time 3 days for bonds.  With a tight expiration of Thursday this is an all or none strangle that would most likely be a full cost risk.

Profit Scenarios
Profit scenarios vary by market activity and exit strategy, but in theory is unlimited.  The concept behind the trade is that the movement of the market and the increase in value of one side of the strangle exceeds the total cost of the trade.  However, if the market looks to have choppy price action, or to trade both positive and negative before the expiration of the options, then legging out of the trade when each side reaches profitability would yield maximum returns.  It is recommended to exit one side on a profit of $300 over and above the cost of the trade, and to hold the other side for a possible reversal.

Risk Scenarios
Max risk is the cost of the trade.  Time value works against you from the moment the volatility expected from the Fed announcement subsides.  To reduce exposure it is recommended that you enter into two spreads allowing you to exit 50% of the profitable half of the trade (for example, on a bond selloff, exit one of the two puts, and hold the two calls) when 75% of the total cost of both spreads occur.

Disclaimer
There is risk of loss in all commodities trading.  Commissions and fees vary per individual and therefore are not included in profit, cost and risk scenarios.  Please consult a licensed broker before you trade for the first time.  Losses can exceed your account size and/or margin requirements.  Commodities trading can be extremely risky and is not for everyone.  Some option strategies have unlimited risk.  Educate yourself on the risks and rewards of such investing prior to trading.  James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise).  Past results are by no means indicative of potential future returns.

James Mound, owner of JMTG Brokerage LLC, MoundReport.com and author of the book 7 Secrets, writes the Weekend Commodities Review Newsletter. Receive your free weekly subscription to the Weekend Review by e-mail. Click here.