Trade Alert – (TLT) July 16, 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)

Cover your short in the July, 2012 (TLT) $130-$135 calls spread at $0.50 or best

Closing Trade-going flat


expiration date: July 20, 2012

Portfolio weighting: 10% = 25 contracts

With four days to run until expiration and our near money strike price less than one point away, I am going to cover my short position in the July, 2012 (TLT) June $130-$135 call spread for a debit of $0.50 or best.

This was a bet that the (TLT) would not trade over $130.54 by the July 20 expiration, or up five points from our initial execution. That equates to a yield on the ten year Treasury bond of about 1.42%, which would match the 60 year low we made last month.

Last week, the government’s auction of new 30-year bonds went spectacularly well and was one of the best on record, with the issue hugely over subscribed by dealers and foreign governments and institutions. It is becoming industry consensus that that the bond market will take another run at the highs before this amazing bull market ends and will take interest rates to knew lows.

With four days left to expiration the risk reward for maintaining this position is no good. Better get out at cost than run the risk. The risk/reward ratio at this point is poor. Leave the potential remaining1.25% profit on the table. It’s not worth it. If this goes wrong, it could cost 5% or more in notional performance very quickly.

If you had any doubts, look at the market action on Friday. With the Dow up 202 points, the (TLT) should have been down 2 full points. Instead, it was only down 1/3 of a point. If you throw bad news on a market and it refuses to go down, watch out above. If the (TLT) does double top here, it is better to read about it in the papers.

Your total profit should amount to (25 X 100 X $0.04) = $100, or .10% for the notional $100,000 model portfolio, which is breakeven after commissions. We weathered a four point move against us in the bond market and can get out at cost. Profit when I’m right and breakeven when I’m wrong is a strategy that I am happy to pursue until the cows come home. Thousands of small hedge funds make their bread and butter doing exactly this sort of trade.

It could be very interesting to put this trade back on with an August expiration five points higher, the $135-$140. But I think I’ll wait until the Fed shows its hand at its month end meeting until dabble any further is the Treasury bond market.

Don’t place a market order for this trade or the floor traders will rip your eyes out. Instead, place a limit day order in the middle market. If nothing happens then start raising your bid in 5 cent increments until something happens. These are the trades you should execute:

Buy to cover the July, 2012 (TLT) $130- calls at…… $0.54

Sell the July, 2012 (TLT) $135 calls at……………… $0.04

Net Debit to cover: ……………………………………$0.50

Time to Bail on Your Treasury Bond Short

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