Treasury Options Expiry

Treasury options expire quarterly. So this month will be the options expiry month for treasuries. Its especially important to understand, since GBN.V trades strongly inversely correlated with long dated U.S. treasury bond prices.

What that means is that when people are buying the stock, these monies are instead parried into treasury futures using the Black Scholes options pricing model in a delta hedging strategy. On each trading day in the stock, you get a great deal of 'churn' which means that nobody is really trading in the stock, except those commercial traders invovled in delta hedging strategies using algorithmic trading schemes. So with small changes in the stock price, you can recycle money into treasuries via the futures markets.

Every once in a while you get a rally in GBN.V shares. This is in anticipation of a major price move in long dated U.S. treasury bond prices, which comes a week before the options expiry date, or major moves in treasury prices. Very likely treasury bonds will advance in price until they can advance no more, but futures options will have a very wide variability and trading range, so this trade will remain active.

"Options cease trading on the last Friday, which precedes by at least two business days, the last business day of the month preceding the option month"

CME Group

If you can make sense of this statement, it probably means that on June 21st, or perhaps just the week before, there will be a rally in the stock price accompanied by high volume, as people settle their contractual obligations.

The derivative associated with this trade is called an equity swap. Meaning they sell you shares, but take the money and bet it on treasury futures. But, they retain voting rights without owning the stock. Be abolutely certain to vote in favour of the board whatever you do, and to use your voting rights. THIS IS EXTREMELY IMPORTANT.

You can see how much short interest there is in a stock through equity swaps by looking up a stock's short position on Bloomberg's Key Statistics for any stock. The bigger the number, the more short-side equity swap bets there are. A negative number means that commercial players are long, rather than short. Look on it as you would a "Commitment Of Traders Report."

The following is what a "normal" options chain looks like. A trader can make huge gains regularily on futures options, especially in the treasuries, but that means you need some money to begin. Enter the retail investor in gold mining stocks. They will massively invest in companies that have extremely dubious circumstances, and leverage up to do so, without doing any research. So commercial traders take that money and make better use of it in treasuries futures markets.

So your investment is temprorarily bucket-shopped while they await for you to sell into the bottom of a stock panic, and make money on treasuries. Each contract is worth $100k. face value, so when you look at the open interest running in the tens of thousands of contracts, we're talking billions of dollars worth of margin leverage.

I estimate since June 22 is the quarterly options expiry for treasuries that likely the week before a run-up in the stock will occur. This is likely to be temporary, as markets are selling off and treasury prices will rise.

http://quotes.ino.com/options/?s=CBOT_ZB.M12.E

-F6