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) May 2022 $127-$130 in-the-money vertical Bear Put spread at $2.60 or best
Opening Trade
4-22-2022
expiration date: May 20, 2022
Portfolio weighting: 10%
Number of Contracts = 40 contracts
Jay Powell certainly thrust a dagger into the stock market yesterday. At this point, the only question is whether we get two back-to-back 50 basis point rate hikes coming, or two back-to-back 75 basis point rate hikes.
We have just seen a $2.50 rally in the (TLT), so I am going back into the short side in the bond market. I now also have substantial longs far below the market to hedge.
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 Consumer Price Index today, which came in unbelievably hot.
People are not taking a 2.90% yield on the ten-year US Treasury bond against an 8.5% inflation rate generating a negative -5.60% real yield because they think it’s a great deal.
I am therefore buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) May 2022 $127-$130 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 UltraShort 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 1.55% from the current 2.91% in four 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 $127.00 by the May 20 options expiration in 20 trading days.
Here are the specific trades you need to execute this position:
Buy 40 May 2022 (TLT) $130 puts at………….………$10.00
Sell short 40 May 2022 (TLT) $127 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 20 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.
