Trade Alert – Expiration (TLT) June 18, 2012

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) - Expiration

Expiration of our short position in the iShares Barclays 20+ Treasury Bond Fund ETF (TLT) June, 2012 $128-$133 calls spread at zero

Closing Trade


expiration date: June 15, 2012

Portfolio weighting: 10% = 25 contracts

This definitely turned out to be one of the great “E-ticket” rides of all time. After selling short an out of the money (TLT) call spread, Treasury bonds rocketed a stunning 9 points to a 200 year high.

It’s a good thing that I am not greedy. My spread was far enough out of the money and short dated enough so that by the time the dust settled it expired well out of the money. A long dated near money position would have been a suicide move. It is all a good lesson on why you never excessively leverage up on these types of strategies. Those who do regularly go out of business.

As it turns out, the short $128 calls closed on Friday at $126.40, a healthy $1.60 out of the money, rendering our short position worthless. The position should disappear off of your account statement today and the margin requirement freed up.

After this experience, I am not inclined to put back on a similar position for the July expiration right now. The Federal Reserve’s decision on the extension of Operation Twist, its $400 billion program to sell short dated paper to buy 30 year bonds, is due out in only two weeks. There is also an important board meeting on Wednesday.

Whatever the decision, volatility could be extreme. So I am going to wimp out here. When QE2 ended a year ago, ending $75 billion of monthly Treasury bond buying by the Fed, everyone thought the market would crash. Instead it soared.

The profit on this trade amounts to (100 X 25 X $0.62) = $1,550. That adds 1.55% to the value of our notional $100,000 model portfolio. On to the next trade.

What?  Short the Treasury Market Again?