When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline.
Trade Alert - (TLT) – BUY
BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) September 2022 $125-$128 in-the-money vertical Bear Put spread at $2.55 or best
Opening Trade
8-9-2022
expiration date: September 16, 2022
Portfolio weighting: 10%
Number of Contracts = 40 contracts
After swanning around Europe for a month, I have to tell you that I’m jonesing to add new position.
However, I will be the first to admit that at the height of the summer doldrums, and at the top of a 10% move in the stock market, there are very few attractive trades out there on a risk/reward basis.
We sucked all the profit out of this market with the killings we made in June and July.
Not only that, the Volatility Index (VIX) has just suffered a decline from $36 to $20 in seven weeks. The few trades out there pay very little. And with the Mad Hedge Marketing Timing Index at 49, it is screaming at us that there is nothing to do.
There is no law that you have to have a position every day of the year. Overtrade your account and only the brokers win. I’m all about cherry-picking.
However, there is one trade here that is worth considering.
I am going to use the modest $3.00 rally in the (TLT) since Friday and the monster $12.00 rally since June to add a long-dated conservative, very deep in-the-money short position in the bond market.
To lose money on this trade, the ten-year US Treasury yield would have to drop from today’s 2.78% to below 2.35% in 27 trading days, which is highly unlikely.
Treasury bonds have in fact been in a steep downtrend that began in the end of November. I expect it to accelerate in the aftermath of the release of the Core Inflation Rate at 8:30 AM on August 10.
People are not taking a 2.78% yield on the ten-year US Treasury bond against a 9.1% inflation rate generating a negative -6.32% real yield because they think it’s a great deal.
I am therefore buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) September 2022 $125-$128 in-the-money vertical Bear Put spread at $2.55 or best.
Don’t pay more than $2.75 or you’ll be chasing on a risk/reward basis.
The only way to lose money on this position is if the US economy heads into a deep recession in the next five weeks. At worst, we are having a mild recession which is already discounted in the market and reflected in the $12.00 rally since June.
The long-term outlook for fixed income is absolutely awful. The next big rotation in the markets will be for tech and financials to bounce hard off a bottom. This will result from coming major upgrades in economic growth, which analysts and strategists are wildly underestimating.
As soon as everyone gets the parts and labor they want, it is going to be off to the races. Add to that a Fed quantitative tightening on monetary stimulus and interest rates will soar.
With the Fed on an announced path of at least 200 basis point in interest rate rises in 2022, there is no chance you’ll see a major rally in the US Treasury bond market from here. The only question is how fast it will fall.
It is almost mathematically impossible for bond prices to rise and interest rates to fall substantially from here. They can only go sideways at best, or down big in the worst case. Sounds like a great short to me.
This is a bet that the (TLT) will not rise above $125.00 by the September 16 option expirations in 27 trading days.
Here are the specific trades you need to execute this position:
Buy 40 September 2022 (TLT) $128 puts at……....………$10.00
Sell short 40 September 2022 (TLT) $125 puts at…………$7.45
Net Cost:………………………….…............……..………….….....$2.55
Potential Profit: $3.00 - $2.55 = $0.45
(40 X 100 X $0.45) = $1,800 or 17.64% in 27 trading days.
The Fat Lady is Singing for the Bond Market
If you are uncertain about how to execute an options spread, please watch my training video by clicking here.
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.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
