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) March 2022 $127-$130 in-the-money vertical Bull Call spread at $2.50 or best
Opening Trade
2-10-2022
expiration date: March 18, 2022
Portfolio weighting: 10%
Number of Contracts = 40 contracts
Bonds are now down a monster $20 points in ten weeks. A year ago, we did $20, nearly hitting the low for the year and the same has happened. The selling is getting overextended for the short term. Bond option volatilities are through the roof, at a one-year high.
With the 7.5% print on Core Inflation this morning, a 40-year high, the bad news is in the price. At worst, we can expect another month or two of hot inflation before it starts to cool off.
I am therefore willing to BUY the US Treasury bond market with a very deep in-the-money vertical bull call spread with a five-week view. This will help balance out our long/short exposure in our model trading portfolio.
The Fed doesn’t move on interest rates for a month and we’ll probably sit around and do nothing until then.
I am therefore buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) March 2022 $127-$130 in-the-money vertical Bull Call spread at $2.50 or best.
Don’t pay more than $2.75 or you’ll be chasing on a risk/reward basis.
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 rise above 2.40% in five weeks, which is highly unlikely. You need the yearend to see those numbers.
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.
This is a bet that the (TLT) will not fall below $130.00 by the March 18 option expiration in 24 trading days. To lose money on this position ten-year US Treasury yields would have to rocket to 2.40% from the current 2.02%, which they won’t.
Here are the specific trades you need to execute this position:
Buy 40 March 2022 (TLT) $127 calls at………….………$9.60
Sell short 40 March 2022 (TLT) $130 calls at…….……$7.10
Net Cost:………………………….………..……......…….….....$2.50
Potential Profit: $3.00 - $2.50 = $0.50
(40 X 100 X $0.50) = $2,000 or 20.00% in 24 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.
