Option Investor
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Watch those bond YIELDS

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There are so many different indicators that traders need to be watching at current levels. One thing I've noticed short-term today is that the 5-year YIELD (FVX.X) has edged green. All this does is have me alert to some selling in this bond as it relates to yesterday's close.

5-year Treasury Note (FVX.X) YIELD Chart - 60-minute interval

There are some nice gains as it relates to bonds and current action might just be some longs taking profits here. Nonetheless traders will want to keep a close eye on things here and see if this action spills over into the 10-year (TYX.X) and 30-year (TYX.X). At some point in a market cycle profits from bonds can flow into stocks. For bearish traders that are short/put, this is a FACT you don't want to ignore. Once again, we're using the bond YIELD to alert us to potential strength in stocks.

NASDAQ-100 Index Tracking Stock (QQQ) Chart - 60-minute interval.

Trading isn't about finding tops or bottoms. Trading is all about making money and measuring risk. By adjusting our stops in the direction of the profitability, trader can remove risk from their trade. Simply looking at the above chart of the QQQ's tells a bearish trader that is short/put this security that their upside reward to $44.75 is $2, while their risk to $49.38 is $2.63. Purely based on these current risk/reward characteristics I'd be lowering my stop on a bearish trade to a more favorable risk/reward level, say $47.50. This can make a big difference especially when you're trading options. If this security is going to $44.75 by session's end, bearish traders should get stopped out at $47.50. This type of trading will keep traders very calm and left without emotion as it pertains to trading. When traders get "emotional" that's when they're in trouble.

Jeff Bailey
Staff Analyst

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