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) – TAKE PROFITS
SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) February 2022 $130-$133 in-the-money vertical Bull Call spread at $2.97 or best
Closing Trade
1-25-2022
expiration date: February 18, 2022
Portfolio weighting: 10%
Number of Contracts = 40 contracts
Bonds have rallied four points and we have earned four days of time decay since we added this position last week. We have now earned 92.50% of the maximum potential profit. In order to have fresh cash to buy the next bond meltdown, which could be imminent, I am taking profits here.
I am therefore selling the iShares Barclays 20+ Year Treasury Bond Fund (TLT) February 2022 $130-$133 in-the-money vertical Bull Call spread at $2.97 or best
As a result, you get to take home $1,480 or 14.23% in 4 trading days. Well done and on to the next trade!
The long-term outlook for fixed income is absolutely awful. Hints from my friends at the Fed indicate that they could take as much as $3 trillion worth of liquidity out of the system by the end of 2023 through the sale of US Treasury bonds.
And while the markets have already discounted the next four 0.25% interest rate hikes, they are not even thinking about the 8 that follow. Yes, I think the overnight rate is headed to 3.0%!
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 2.25% 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 was a bet that the (TLT) would not fall below $133.00 by the February 18 option expiration in 20 trading days. To lose money on this position, ten-year US Treasury yields would have to rocket to 2.25% from the current 1.88%, which they won’t.
Here are the specific trades you need to close out this position:
Sell 40 February 2022 (TLT) $130 calls at…………........………$13.00
Buy to cover short 40 February 2022 (TLT) $133 calls at……$10.03
Net Proceeds:………………............………….………..………….….....$2.97
Profit: $2.97 - $2.60 = $0.37
(40 X 100 X $0.37) = $1,480 or 14.23% in 4 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.
