BigTrends

Editors Note: Thanks to the New LiveVolPro.com for Charts and Information Below - We are Currently Running a Full Review on the World Class Volatility Program, in the meantime you can check out the free version here (LiveVol.com). 

Around 12:35PM on Wednesday just 90 minutes prior to Bernanke & Co. released the ‘official' outlook on the US economy a large options trade was placed in a benchmark bond ETF.  The Lehman 20+ Yr. Treasury Bond ETF (TLT) saw heavy options action in the form of what looks like a bearish leaning straddle trade.

January 115 PUT

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January 115 CALL

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Traditional Straddles employ the use of buying an ATM call and ATM puts where the buyer's expectation is increased volatility (in either direction).  In effect, one side goes worthless while the other side increases in value theoretically netting out in a gain.  Generally, volatility must increase a substantial amount fast and buyers should also be concerned that this expectation may already be priced in.

Profit/Loss TLT 115 Straddle

In today's case, the large option trade can be broken down into a bet on treasury volatility with a bullish bias on bond yields.  TLT reflects the price of bonds, which trades inverse to yields.  Effectively, the buyers of the bearish straddle expect rates to increase, either in the short-term or certainly before January.   As of now the total investment is around 11.5 million, a hefty gamble to make 90 minutes before the FED statement.  

TLT 3 Month Chart with Implied Volatilities 30, 60 90
Image Courtesty of LiveVol.com

If you're interested in taxes and how the government is spending our money, as I suspect you are, then you'll find this tool very enlightening...  Go ahead zoom in (scroll on the mouse) to read where every single penny is being allocated.  (compliments to WallStats)

We get the Fed announcement on Wed, then later in the week Chairman Bernanke will testify about the whole BAC/MER mess that occurred last fall.  The first part is mostly dressing...we don't expect much from the Fed other than to say they could keep on buying treasury bonds, helping to keep rates low.  The testimony in front of Congress is going to be interesting.  What role did Bernanke play?  Was it illegal?  Will he implicate others?  President Obama is watching carefully, and if it doesn't pan out well we might have a new Fed Chairman next spring.   

Following expiration, this next week is filled with landmines, regardless of your bullish/bearish bias.  The Fed has a meeting this week and will arguably be discussing the economy, green shoots and the potential inflation on the horizon.  There are a smattering of earnings reports too, and let's not forget we are entering the 'confessional period', where companies who may miss their earnings step up and make it known.  I doubt there will be much action there as earnings estimates were taken way down.  On the economic front, durable goods will be watched closely along with income/spending figures.  Home sales are early in the week, looking for another robust sign of a bottom, while sentiment is out later in the week.

Today we'll hear from a few Fed governors who step on the soapbox.  One in particular, Jeff Lacker, is a noted inflation hawk who has been squawking lately about his concerns.  Surely there is some inflation out there, look around you...just go to the gas pump and you'll see it.  But if he and the other governors display some concern over rising inflation, is it just lip service, smackdown/talkdown prices or are they really going to threaten higher rates?  The yield curve is quite steep now and portrays a picture of very healthy growth, perhaps too healthy.  The Fed actions tend to lag so even if they did raise rates the effect would not be felt until early 2010.  Keep your ears to the ground and pay attention to what is being said and by whom, that's the best edge you have in this game.

Many are beginning to speculate that the Fed may raise rates by the end of this year ... don't count on it, in my view its not likely.  Unemployment is still the #1 concern to both politicians and the public, and the jobless rate is rising not falling.  The Fed does not want to buck the new Presidential Administration, which keeps re-iterating that things will not turn around quickly and needs support for its various stimulus programs. 

The Fed basically did not change a thing with their statement, except they continue to buy more 'stuff' with the expanded balance sheet.  One thing that was interesting was the 'quiet' stimulus released by the Govt.  Simply put they have thrown another bone to the consumer with the following: