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) February 2022 $147-$150 in-the-money vertical Bear Put spread at $2.60 or best
Opening Trade
1-19-2022
expiration date: February 18, 2022
Portfolio weighting: 10%
Number of Contracts = 40 contracts
With German ten-year Bunds going positive for the first time in three years, we have new gasoline poured on the burning US Treasury bond market. Yields have rocketed up 40 basis points in a month.
Yes, inflation is finally hitting the Fatherland, home of post-WWI billion percent inflation. Eurozone inflation just topped 5%, well above its 2% target. British inflation hit a 30-year high. The move has lit a fire under all Euro currencies.
Methinks the down move in (TLT) has more to go.
Treasury bonds have in fact been in a steep downtrend that began in end of November. I expect it to accelerate in the aftermath of the release of the Consumer Price Index today, which came in unbelievably hot.
People are not taking a 1.90% yield on the ten-year US Treasury bond against a 7.0% inflation rate generating a negative 5.10% real yield because they think it’s a great deal.
I am therefore buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) February 2022 $147-$150 in-the-money vertical Bear Put spread at $2.60 or best
Don’t pay more than $2.75 or you’ll be chasing on a risk/reward basis.
If you don’t play options, just go out and buy the ProShares Ultra Short Treasury Bond Fund (TBT) outright.
The long-term outlook for fixed income is absolutely awful. The next big rotation in the markets will be for tech and bonds to peak out and for 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 taper on monetary stimulus and interest rates will soar.
With 2022 expected to be one of the strongest years for economic growth in history, 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.
This trade is basically betting that interest rates will rise in front of the biggest borrowing in human history.
To lose money on this trade, the ten-year US Treasury yield would have to drop below 1.40% in five weeks, which is highly unlikely.
The fundamentals of this trade are very simple. The national debt rose to an eye-popping $30 trillion in 2021. In 2022, it is expected to explode to $33 trillion. The US Treasury demands on the bond market are going to be incredible.
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 $147.00 by the February 18 options expiration in 22 trading days. To lose money on this position, ten-year US Treasury yields would have to plunge to 0.90% from the current 1.32%, which they won’t.
Here are the specific trades you need to execute this position:
Buy 40 February 2022 (TLT) $150 puts at………….………$10.00
Sell short 40 February 2022 (TLT) $147 puts at………....…$7.40
Net Cost:…………………………..............………..………….….....$2.60
Potential Profit: $3.00 - $2.60 = $0.40
(40 X 100 X $0.40) = $1,600 or 16.00% in 22 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.
