Trade Alert – (TLT) September 5, 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 (TLT) October $132-137 call spread at $0.58 or best

Opening Trade


expiration date: 10-19-2012

Portfolio weighting: 10% on a delta basis

($10,000/100/$0.58) = 50 Contracts

I think that at this point you can pretty much take the crash scenario off the table for the stock market, at least until year end. Next week, the Federal Reserve Open Market Committee meets to decide on whether they should launch QE3.

If they do, then all risk assets rocket. If they don’t, then people will assume they will implement the expansionary monetary strategy at a future meeting in 6 or 12 weeks and do nothing until then. This means that in all possible outcomes, stocks either go up or sideways.

The presidential election is also market positive. I have written in the past that an Obama win is a slam dunk. As of today, he is ahead 9 points in Ohio. But it really makes no difference who wins. Uncertainty is the definite loser for the simple reason that the election will soon be out of the way, and we can now get on with the rest of our lives.

Net all of this out, and it paints a picture for the bond market that has it going sideways or down. Look at the chart below. You can see that the (TLT) sold off 12 points from its July high at $132, then bounced a very neat 8 points to today, a perfect 66% Fibonacci resistance level. That makes today a great time to sell.

So I am going to sell short the (TLT) October $132-137 call spread at $0.58 or best. If the (TLT) stays below $132 by the October 19 expiration, an all-time high, the value of this put spread goes to zero, giving you a profit of $0.58. That would add (50 X 100 X $0.58) = $2,900, or 2.90% profit for the notional $100,000 portfolio.

The breakeven point on this trade in terms of the ten year Treasury yield is about 1.38%, or 20 basis points higher than here. It has a mere six weeks to do this.

To execute this trade:

Sell short 50 October, 2012 (TLT) $132 calls at……$0.85

Buy 50 October, 2012 (TLT) $137 calls at………….$0.27

Net Premium Proceeds:……………….……………...$0.58

Enter this trade as a single day limit order for the entire spread, not the individual legs. If you don’t get done, work your limit up a penny at a time. Your options trading platform should allow this. That keeps you from paying a double spread. If you can’t do the spread then consider buying November put options outright, or selling short the (TLT) ETF directly.

Remember, you have to do this as a spread, and not an outright short of the $132 calls only to cap and define your risk, as well as minimize your margin requirement for the position.