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) October 2021 $155-$158 in-the-money vertical Bear Put spread at $2.60 or best
Opening Trade
9-23-2021
expiration date: October 15, 2021
Portfolio weighting: 10%
Number of Contracts = 40 contracts
I believe that the comments from Jay Powell yesterday spelled a death knell for the bond market. The Fed governor said that there will be 4-6 Interest Rate Rises by 2024 which may start as early as 2024. The markets will start discounting that NOW.
The taper could start in November. Bonds rose slightly on the news, but the writing is now definitely on the wall. The Fed now expects a historic 5.9% GDP for 2021 and a stratospheric 3.8% for 2022.
Treasury bonds have in fact been in a gentle downtrend that began in mid-July. I expect it to accelerate in the aftermath of the release of the Consumer Price Index Tuesday morning, which is expected to be unbelievably hot.
People are not taking a 1.37% yield on the ten-year US Treasury bond against a 5.3% inflation rate generating a negative -3.93% real yield because they think it’s a great deal.
I am therefore buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) October 2021 $155-$158 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 Ultra Short Treasury Bond Fund (TBT) outright.
With 70% of the US population already vaccinated and 10% having immunity from the disease, only 20% are left to get sick. Eventually, ALL of them will get it, but it will not force a second shutdown of the economy.
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 raises. Add to that a Fed taper on monetary stimulus and interest rates will soar. At the very least they have to stop stimulating the housing market with $40 billion a month's worth of mortgage-backed securities.
With 2021 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 0.90% in two weeks, which is highly unlikely.
The fundamentals of this trade are very simple. The national debt rose from a record $23 trillion to an eye-popping $28 trillion in 2020. In 2021, it is expected to explode to $32 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 $155.00 by the October 15 option expiration in 16 trading days.
Here are the specific trades you need to execute this position:
Buy 40 October 2021 (TLT) $158 puts at………….………$9.00
Sell short 40 October 2021 (TLT) $155 puts at…….……$6.40
Net Cost:………………………….………..........………….….....$2.60
Potential Profit: $3.00 - $2.60 = $0.40
(40 X 100 X $0.40) = $1,600 or 16.00% in 16 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.
