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) – SELL-TAKE PROFITS
SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) March 2019 $126-$129 in-the-money vertical BEAR PUT spread at $2.90 or best
Closing Trade
2-11-2018
expiration date: March 15, 2019
Portfolio weighting: 10%
Number of Contracts = 40 contracts - CUT POSITION BY HALF
I love one-day wonders.
On Friday, the world was going to hell in a handbasket because of the lack of progress on the China trade talks and bonds were bid through the roof. Today, everything is coming up roses because of rumored progress in the China trade talks and bonds are being dumped like last week’s garbage.
What’s the difference in the bond market (TLT)? About 1 ¼ points. Leverage that with a vertical bear put option spread and you get a monster $4,000 profit in only one trading day.
With 83.33% of the maximum potential profit in hand, I am going to cut a very aggressive short position in half. With nearly five weeks left until the March 15 option expiration the risk reward of continuing with such a hefty position is no longer favorable.
Specifically, I am selling the iShares Barclays 20+ Year Treasury Bond Fund (TLT) March 2019 $126-$129 in-the-money vertical BEAR PUT spread at $2.90 or best, which is dead in the middle of the market.
This was a bet that the (TLT) would not rise above $126.00 by the March 15 expiration day. That would require ten-year US Treasury bonds to fall below 2.40%, a three-year low, versus the current 2.63%. That is highly unlikely, given all the stimulus that is out there in the economy.
Combined with my existing February 15 (TLT) $124-$126 vertical bear put spread, that means I ran a triple short in the bond market over the weekend which paid off in spades. This second bond position expires with the coming Friday options expiration. Occasionally, having 50 years of trading experience comes in handy.
If you bought the (TBT) instead of the options, keep it. You should be able to squeeze a full 10% out of this trade.
The fundamental reasons for this trade are growing by the day.
1) Resolution of the China trade war will provide a short burst of economic growth, even if it doesn’t happen by March 1.
2) The Fed is dropping on the bond market $50 billion a month, or $1.70 billion a day worth of paper in its QE unwind.
3) Massive Tax cuts for corporations are still providing further stimulus for the US economy.
4) With the foreign exchange markets now laser-focused on America’s exploding deficits and fading interest rate picture, a weak US dollar has triggered a capital flight out of the US.
5) We also now have evidence that China has started to dump its massive $1 trillion in US Treasury bond holdings.
All are HUGELY bond negative.
To lose money on this position, the (TLT) would have to rise above $126, and yields would have to drop below 2.40%, which they absolutely won’t ahead of a new deluge of bond selling from the Fed.
If you don’t do options, this would be a great level to scale into a long in the ProShares Ultra Short 20+ Treasury Bond Fund (TBT), a bet that bonds will fall.
Here are the specific trades you need to execute this position:
Sell 40 March 2018 (TLT) $129 puts at………….…….……$7.45
Buy to cover short 40 March 2018 (TLT) $126 puts at……….$4.55
Net Proceeds:………………………….……..………….….....$2.90
Profit: $2.90 - $2.40 = $0.50
(40 X 100 X $0.50) = $2,000 or 20% in 1 trading days.
To see how to enter this trade in your online platform, please look at the order ticket above, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on How to Execute Vertical Call and Put Debit Spreads by clicking here.
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Please keep in mind that these are ballpark prices only. There is no telling how much the market can move by the time you get this.
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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 close to expiration.
If you don't get done, don't worry. There are another 250 Trade Alerts coming at you over the coming 12 months.