Follow Up to Trade Alert - (TLT) August 14, 2015
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. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.
Trade Alert - (TLT) - UPDATE
BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) September, 2015 $128-$131 in-the-money vertical bear put spread at $2.62 or best
Opening Trade
8-14-2015
expiration date: September 18, 2015
Portfolio weighting: 10%
Number of Contracts = 38 contracts
There is absolutely no doubt in my mind that the surprise five point spike up in the bond market this week is entirely due to the shocking devaluation of the Chinese Yuan.
Prior to that, fixed income markets were discounting the inevitable rise in US interest rates and fall in the bond market. It is really irrelevant whether Janet makes her move in September, December, or sometime in 2016. The writing is on the wall.
Bonds should start feeling the heat now.
Yesterday, the Beijing government reduced support for the Yuan for a third time, and then swore on a stack of Chairman Mao?s Little Red Book that this was the last one.
I take them at their word, even though my Mandarin is sparse to say the least.
To continue devaluating would risk importing substantial inflation into the Middle Kingdom. They can get away with this now because the price of their largest import, oil, is in free fall.
It would risk a real currency war with the United States, which is unhappy about seeing all of the last year?s Yuan appreciation undone in a heartbeat.
If China pushes any further, they may see the trading sanctions and anti dumping duties rain down upon them like a summer typhoon.
They would also see what little credibility they still have in international markets fall into tatters. No one ever said building a domestic financial system was going to be easy.
In any case, the Yuan drop is still small compared to the declines of other major currencies over the past year, most notably again the Euro (-18%) and the yen (-21%) (see chart below).
Better to keep it that way.
Keeping all this in mind, I am more than happy to take on a new short position in the Treasury bond market through buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) September, 2015 $128-$131 in-the-money vertical bear put spread.
You can pay up to $2.70 for the spread and still make a decent profit. If you can?t do options, then buy the ProShares Ultra Short 20+ Year Treasury 2X ETF (TBT) outright.
We can take four more points of upside heat if we have to, which would take ten year Treasury yields below 2.00%. I?m happy to bet that is not going to happen.
For more depth on the Chinese currency crisis, please click here for ?China?s Firecracker Surprise?.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don?t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
If the price of this spread has moved more than 5% by the time you receive this Trade Alert, don?t chase it. Wait for the next one. There are plenty of fish in the sea.
Here are the specific trades you need to open this position:
Buy 38 September, 2015 (TLT) $131 Puts at?????$7.55
Sell short 38 September, 2015 (TLT) $128 puts at?..?$4.93
Net Cost:????????????????.....$2.62
Potential Profit at expiration: $3.00 - $2.62 = $0.38
(38 X 100 X $0.38) = $1,444 or 1.44% profit for the notional $100,000 portfolio.
