How about if I told you there was a relatively low-risk trade setting up that offered a 500% return? Would it help if I told you it was in the world’s most liquid market?
So, I bet you’re thinking the latest small cap technology stocks, Bitcoin, vintage cars, or collectable French postage stamps.
In reality, I’m talking about the US Treasury bond market.
I’m not saying you should add this position right now. Nor am I advocating that you bet the ranch on this one. But there is one hell of a trade setting up in the bond market over the next year or so.
Let’s go through what Albert Einstein used to call a “thought experiment.”
Today, the United States Treasury Bond Fund (TLT) is trading at a four-year high at $143. If you go a mere $20 out-of-the-money, you can buy the (TLT) January 2021 $120-$123 vertical bear put spread for 50 cents.
If interest rates rocket from today’s 1.61% to back up to 2.85% and the (TLT) collapses from $143 down to $120 by January 22, 2021, the value of this position will soar from 50 cents to $3.00, a net gain of 500%.
This is not some pie-in-the-sky, Armageddon type scenario. This, in fact, was the level of interest rates that prevailed only nine months ago in December. The nice thing about seeing interest rates on the way down, you always get to revisit them again on the way up.
I’m not saying these are the strikes or the expirations dates you should be targeting. By the time the (TLT) tops out, it could be trading at $200, and you should be targeting the January 2022 $177-$180 vertical bear put spread.
I can pretty much guarantee you that when the (TLT) skyrockets to $200, celebrity commentators on CNBC, analysts at JP Morgan, and strategists at Seeking Alpha will be running around with their hair on fire screaming that the next stop is at $300. That’s always how things end.
Not only that, you might get the chance to put these on for several months in a row, in which case you will have multiple 500% gains in a row lining up.
Like I said, there is one heck of a trade setting up for treasury bonds. All you have to do is be patient.