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2011issue C0248-53

A five-day Treasury bond option sale as a market-regime choice

A historical expiration-week-sale into November 2010 US Treasury bond options treated slightly out-of-the-money premium as time value that would vanish if a chosen boundary held. The December futures path and the November 131 call’s stochastic-of-option-price framed whether that premium was already depressed.

  • All out-of-the-money options expire worthless, so the practical problem is locating an out-of-the-money-boundary that will still be out of the money at expiration.
  • The case used a five-day-holding-limit into the November 2010 US Treasury bond option expiration on Friday, October 22, 2010, which settled against December futures.
  • Slightly out-of-the-money options were treated as time-value-only-premium expected to go to zero by Friday if that boundary held.
  • The December T-bond chart showed seven lower closes and a close near 131.00, while the November 131 call’s 10-day stochastic-of-option-price reached 2.22 and was read as an already depressed premium.
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Current trackOption expiration analysis38 readingsOption income strategy85 readingsOption premium analysis103 readings

The boundary problem

All out-of-the-money options expire worthless. The practical problem is locating the strike that will remain out of the money. In this workflow that strike is the out-of-the-money-boundary: the price the market is judged unlikely to reach before expiration.

The archive facts describe a historical expiration-week workflow. Where TradersWeek draws a regime lesson from that workflow, the reading is labelled editorial.

The five-day sale

The case limited the sale to a maximum five-day hold into the November 2010 US Treasury bond option expiration on Friday, October 22, 2010, which settled against December futures. That five-day-holding-limit keeps the expiration-week-sale inside the remaining calendar week, so remaining time value is the main source of profit if the strike stays out of the money.

Slightly out-of-the-money options were treated as time-value-only-premium expected to go to zero by Friday if the boundary held.

Price path into the week

The December T-bond daily chart showed a short-term selloff with seven lower closes and a close near 131.00 entering expiration week. A four-point selloff in a short span left open a rebound scenario as well as continued weakness during the following week.

The at-the-money premium reading

The November 131 call was the at-the-money contract. Its 10-day stochastic-of-option-price reached as low as 2.22 and was read as an oversold premium that might stay depressed until expiration.

That stochastic-of-option-price applies a momentum reading to the option’s own price path rather than to the underlying, and was used here to judge whether the premium is already depressed.

10-day stochastic of the November 131 put

Into expiration week the 10-day stochastic of the at-the-money November 131 put reached 85, an overbought print that argued the December bond future was more likely to rebound or drift than keep falling. The path is traced from the published oscillator pane on the 0–100 scale with 20/80 bands; the 85 peak is the reading the article states.
Into expiration week the 10-day stochastic of the at-the-money November 131 put reached 85, an overbought print that argued the December bond future was more likely to rebound or drift than keep falling. The path is traced from the published oscillator pane on the 0–100 scale with 20/80 bands; the 85 peak is the reading the article states.November 2010 US Treasury bond 131 put (OZBX10 P131) · Daily · 2010-10-11T00:00:00.000Z to 2010-10-25T00:00:00.000Z

TradeStation Stochastic Fast on the option price itself (High, Low, Close; lookback 10, smoothing 3), not on the underlying future. Points other than the stated 85 peak are read from the raster and rounded to whole oscillator points. November T-bond options expired 22 October 2010.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
13 of 23 in the Option expiration analysis track
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