Follow Up to Trade Alert - (TLT) February 3, 2014
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.
Further Update to: Trade Alert -(TLT)
Buy the iShares Barclays 20+ Year Treasury Bond Fund (TLT) June, 2014 $106 puts at $2.42 or best
Opening Trade
2-3-2014
expiration date: 6-20-2014
Portfolio weighting: 5%, or $5,000
Number of Contracts = 21 contracts
After sitting on my hands, shuffling the papers around my desk several times, and going for my umpteenth coffee refill, I finally pulled the trigger on my iShares Barclays 20+ Year Treasury Bond Fund June, 2014 $106 puts trade. It finally entered no brainer territory.
It hit me what had been driving markets this year, but it took a ten pound sledge hammer to do it.
Bonds have had it absolutely right this year. They took off right out of the gate on January 2 and never looked back.
Stocks on the other hand have been much more confused and disoriented, like an airplane pilot doing aerobatics on Instrument Flight Rules. They initially rose a little bit, right along with bonds, which almost never happens. You knew that wasn?t going to last.
Then they flat lined for two weeks. It took almost a month before traders realized that the punch bowl was gone and it was time to head into ?RISK OFF? mode. The tardy call can be traced to the fact that you calculate your average stock traders? IQ by taking a bond trader?s and then dividing by two.
What all this means is that the bond market has been correctly calling market direction two weeks before the stock market has. This is bound to continue.
There is another factor to consider here. Bond traders have now seen a whopping great eight point rally in a month, taking the yield on the ten year Treasury bond down a massive 45 basis points, from 3.05% to2.61%. That is just too much profit to sit on. That is a world ending performance for bonds. Except that the world isn?t ending. Armageddon, it is not. So the pros that got this one right are increasingly going to be sellers on rallies from here on.
If I am wrong on this one, it will be only by a couple of basis points, with the ten year possibly making it to the high 2.50?s. The global synchronized economic recovery is still on schedule. The economic data and corporate earnings are just too good to see yields drop to 2.50% or lower.
Profit margins are at all time highs, and rising (see chart below). The heart-rending volatility we have seen so far in 2014 is therefore technical in nature, and not fundamentally driven. It is just a matter of a few days or weeks until the fundamentals reassert themselves, as they always do.
That could happen as early as Friday, when a blockbuster nonfarm payroll is expected to hit. The shocking 84,000 December number reported in January was a weather driven anomaly. Expect this week?s January figure to come in strong, as well as providing big upward revisions to the December report.
Which brings me to the iShares Barclays 20+ Year Treasury Bond Fund June, 2014 $106 put. Only a global synchronized recession would prevent the (TLT) from trading below $103.58, my breakeven point on an expiration basis, over the next five months.
If the (TLT) makes it back to unchanged on the year at $101 by the June 20 expiration, this position will be up $5,418, or $5.41% for our notional $100,000 portfolio. If it makes it down to $101 sooner, we will make even more money, as there will still put some remaining time value in the put option.
That is up 108% from my initial cost. For that I am willing to take a few basis points of heat for a few days or weeks. It is an ideal buy and hold position, like, for example, you were just about to take a long trip to New Zealand and Australia.
Sounds like a no brainer to me!
Here are the specific trades you need to execute this position:
Buy 21 June, 2014 (TLT) $106 puts at?????..?$2.42
Net Cost:????????????....??..??.......$2.42
Potential Profit with (TLT) at $101 on expiration: $5.00 - $2.42 = $2.58
($2.58 X 100 X 21) = $5,418 or 5.41% for the notional $100,000 model portfolio.
