As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Trade Alert - (TLT)
Sell the iShares Barclays 20+ Year Treasury Bond Fund (TLT) February, 2013 $123-$126 put spread at $2.90 or best
expiration date: February 15, 2013
Portfolio weighting: 10% = 40 contracts
I am going to use the dramatic spike down in Treasury bond prices this morning to cover my short position and sell my iShares Barclays 20+ Year Treasury Bond Fund (TLT) February, 2013 $123-$126 put spread at $2.90.
The spike down was triggered by spectacular weekly jobless claims showing an unbelievable -47,000 decline in applications to 332,000. On top of that we saw a blistering 12.1% gain in December housing starts. As I expected, the economic data continues to shock to the upside. Yields for the ten-year paper leapt from 1.80% to 1.88% in one shot.
The move pumped up the value of the put spread at the opening this morning, from my $2.60 cost to $2.90. Since the maximum ceiling on the position is $3.00, we have harvested 75% of the potential profit. From a risk reward point of view, there is no sense in going on. Take your six-day, 1.20% addition to the value of your portfolio and run. This move also frees up capital so we can be opportunistic when extreme moves happen in the market.
In the off chance that we get a bad data point for the economy in the near future and Treasury bonds spike, I will look to reestablish this position.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. This alert is for the monthly options. Don’t buy the weeklies by accident. The difference between the bid and the offer on these spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out. These are the trades you should execute:
Sell 40 February, 2013 (TLT) $126 puts at……………………$7.25
Buy to cover short 40 February, 2013 (TLT) $123 puts at…..$4.35
Maximum potential profit at expiration:
$$2.90 - $2.60 = $0.30
(40 X 100 X $0.30) = $1,200, or 1.20% profit for the notional $100,000 portfolio for a three month position.
The Fat Lady is Singing