Trade Alert – (TLT) June 20, 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)

Sell short the July, 2012 (TLT) $130-$135 calls spread at $0.54 or best

Opening Trade


expiration date: July 17, 2012

Portfolio weighting: 10% = 25 contracts

With the ten year Treasury bond now yielding 1.60%, I think we are getting overextended on a short term basis. So I am going to sell short the July, 2012 (TLT) June $130-$135 call spread for a credit of $0.54 or best.

This is a bet that the (TLT) will not trade over $130.54 by the July 15 expiration, or up five points from here. That equates to a yield on the ten year Treasury bond of about 1.32%, which would be a new 60 year low, and quite a distance from here. That is a lot of real estate to cover in only 17 trading days.

If Greece forces us into major meltdown mode, we can always hedge this modest “RISK ON” trade through taking more aggressive “RISK OFF” positions, like selling short the (FXE), (SPX), (IWM), (GLD), or the (SLV).

By selling short the spread instead of the outright calls, your margin requirement drops by about 90%. Margin clerks vastly prefer limited risk trades, like this one, to open ended ones, no matter how unachievable the strikes may be. It is just all numbers to them. The total margin requirement for 25 X July, 2012 (TLT) $130-$135 call spreads should be a little north of $10,000, plus the premium realized.

If this spread expires worthless, as I hope, your total profit should amount to (25 X 100 X $0.54) = $1,350, or 1.35% for the notional $100,000 model portfolio. Professional bond traders do this sort of trade all day long.

The $130 level for the (TLT) also shows up as a major resistance point in all sorts of technical strategies. If you are unable to execute on this trade for any reason, treat it as an educational trade. Just sit it back and watch how it unfolds.

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:

Sell short the July, 2012 (TLT) $130- calls at $0.77

Buy the July, 2012 (TLT) $135 calls at $0.23

Net Proceeds: $0.54