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) – EXPIRATION AT MAX PROFIT
EXPIRATION of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) February 2022 $147-$150 in-the-money vertical Bear Put spread at $3.00
Closing Trade
2-18-2022
expiration date: February 18, 2022
Portfolio weighting: 10%
Number of Contracts = 40 contracts
Just to be clear, this position does not expire at max profit until 4:00 pm EST close today. But with a record nine positions expiring at the same time, I am going to start rolling out the accounting now, so you don’t get overwhelmed.
With the upper strike price an astonishing 7.22% in the money, which is huge for the bond market, I think it is safe to call this one a win. As a result, you get to take home $1,600 or 16.00% in 20 trading days.
Well done, and on to the next trade.
You don’t have to do anything with this expiration.
Your broker will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning, February 21 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
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 1.95% 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.
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 was a bet that the (TLT) will not rise above $147.00 by the February 18 option expiration in 20 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 is the specific accounting you need to close out this position:
Expiration of 40 February 2022 (TLT) $150 puts at………….………$10.83
Expiration of short 40 February 2022 (TLT) $147 puts at……..……$7.83
Net Proceeds:………………………….………..………..................….….....$3.00
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.
