Trade Alert – (TLT) May 23, 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 June, 2012 (TLT) $128-$133 calls spread at $0.62 or best

Opening Trade


expiration date: June 15, 2012

Portfolio weighting: 10% = 25 contracts

With the ten year Treasury bond now yielding 1.70%, I think we are getting overextended on a short term basis. So I am going to sell short the June, 2012 (TLT) June $128-$133 call spread for $0.62 or best.

This is a bet that the (TLT) will not trade over $128.62 by the June 15 expiration, or up 4.2 points from here. That equates to a yield on the ten year Treasury bond of about 1.55%, 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 16 trading days.

Furthermore, I think the Treasury market may stall out close to here until Ben Bernanke shows his hand on whether to resume the “twist” policy which expires on June 30, two weeks after the expiration. “Twist” is the policy of buying 30 year Treasury bonds and selling short shorter term paper that it has been executing in the market place since September, artificially driving bond yields down.

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 June, 2012 (TLT) $128-$133 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 $0.62) = $1,550, or 1.55% for the notional $100,000 model portfolio. Professional bond traders do this sort of trade all day long.

The $128 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 10 cent increments until something happens. These are the trades you should execute:

Sell short the June, 2012 (TLT) $128- calls at $0.90

Buy the June, 2012 (TLT) $133 calls at $0.28

Net Cost: $0.62