Follow Up to Trade Alert - (TLT) September 24, 2013
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.
Further Update to: Trade Alert - (TLT)
Buy the iShares Barclays 20+ Year Treasury Bond Fund (TLT) October $100-$103 bull call spread at $2.82 or best
Opening Trade
9-24-2013
expiration date: 10-18-2013
Portfolio weighting: 10%
Number of Contracts = 35 contracts.
The Fed?s decision not to taper, and therefore keep interest rates lower for longer, gave a great flashing green light to the bond market. It has been off to the races ever since, with the iShares Barclays 20+ Year Treasury Bond Fund (TLT) blasting through resistance this morning to new two month high. As this is off a double bottom on the charts that has been unfolding since July, the move looks pretty solid.
With the imminent appointment of my friend, Janet Yellen, as chairman of the Federal Reserve, I think we may not see a real taper until well into 2014. I heard yesterday that the White House staff has been ordered to start talking her up, now that their favorite, Larry Summers, has been sent to an assisted living facility.
So bonds have more to run, easily taking the yield on ten year Treasuries from this morning?s 2.70% down to 2.50%. There we may stall out and define the lower end of the new range for bond yields for quite some time.
I have been begging readers for the past month to take profits in their short bond positions and sell their holding in the ProShares Ultra Short 20+ Year Treasury ETF (TBT). If they did, they are nicely positioned to buy it back the next time it hits $70, down from the recent $82 peak. That is roughly where we hit the 2.50% ten-year yield.
That could be the bond trader?s lot for the next six months, buying every time we hit a 3% yield, and going short at the 2.50% yield. They deserve nothing less. If they had real balls, they?d be stock traders.
Keep in mind that this is a counter trend trade, which are always dangerous. I am convinced that we are now 13 months into the Great Bear Market for bonds that could last another 20 years. Future capital flows will be defined by moving out of bonds into stocks probably until the end of the 2020?s. So I am being careful here, keeping maturities short at a little more than three weeks, the size small, and the strikes distant.
This is not my best-timed trade of the year, and I am a little late to the party. As has lately so often been the case, prices turn on a dime, and don?t let anyone in, as there are no pullbacks. This is a sign of a market dominated by professional momentum traders, not stay at home day traders.
So the potential profit on this trade is only a modest $630, or 0.63% for the model $100,000 trading portfolio. The risk is small, and therefore, so is the payoff. If this doesn?t appeal, or if the commissions end up eating too much of your profit, just walk away. Or, you could wait for better prices with a pullback in the (TLT) to get the better return. Or, just watch it play out in the paper portfolio as a training exercise.
The attraction of this position is that it gives us a participation in the unfolding smack down in Washington over the debt ceiling crisis. It also establishes a ?RISK OFF? position, which I can use to counterbalance my existing ?RISK ON? positions. It?s always nice to have a hedge on in case the wheels fall off the market.
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.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months further out.
Here are the specific trades you need to execute this position:
Buy 35 October, 2013 (TLT) $100 calls at?????..?$6.20
Sell short 35 October, 2013 (TLT) $103 calls at??....?$3.38
Net Cost:????????????....??..??.......$2.82
Potential Profit: $3.00 - $2.82 = $0.18
($0.18 X 100 X 35) = $630, or 0.63% for the notional $100,000 model portfolio.
