Considering Our Options – $TLT

by Enis July 3, 2013 11:08 am • Commentary

With the widely watched Payrolls release on Friday, we have discussed what to do with our TLT position over the last week.  It’s liable to move on the report given the Fed’s focus on the jobs data and the unemployment rate for its potential tapering later this year.  

We’ve decided to leave our long TLT call fly position because of our total portfolio.  This is an important point.  If we had the TLT call fly position as our only trade, we would probably take it off here for around flat, since TLT has not bounced off the lows of last week as strongly as we expected.  It’s also a decaying position at this point, with less than 3 weeks to expiry.

However, since we are net short stocks, we view the TLT long call fly as a hedge, though imperfect, ahead of the jobs report on Friday.  If the jobs report is strong, we are of the opinion that stocks are more likely to sell off as rates move higher (a case of good=bad) because of the market’s focus on the Taper.  If the jobs report is weak, we see TLT due for a very strong rally, with initial resistance around 112 and next resistance around the 50 day ma close to 115.  In that scenario, we think stocks likely rally as well, though this week’s highs might act as resistance for stocks.

In other words, we don’t view this as a normal jobs report.  With that in mind, we are going to keep our long TLT call fly into the jobs report, mainly because of the nature of our other positions.



Original Trade June 6, 2013: 

I’ve discussed the importance of the $110 level on TLT (iShares 20 Year Treasury etf) on a couple occasions in the past 2 weeks.  Here’s the 5 year weekly chart to reiterate the importance of that level:


[caption id="attachment_27300" align="alignnone" width="627"]5 year weekly chart of TLT 5 year weekly chart of TLT, Courtesy of Bloomberg[/caption]

This is long-term support, and it has held so far today.  TLT briefly traded below 110 in the pre-market, but quickly bounced.  The risk/reward of a long entry here is quite good, WITH the caveat that the trade should be stopped out below 109.

Despite the collapse in bonds in the past 2 months, here are 3 reasons why they could rally:

  1. Flight to the U.S. as emerging market crash continues.  The rally of the dollar usually leads eventually to a rally in Treasuries, as that’s the most liquid U.S. dollar instrument available.
  2. Deflationary signals are everywhere, particularly in commodities and international markets.  When deflation is the culprit for markets to sell off, bonds eventually tend to catch a bid.  
  3. The equity market’s pullback, if it deepens, makes it less likely that the Fed tapers, or at least makes it more likely that they change their tone to become more dovish in the coming months.  

Of course, don’t just take my word for it.  Here’s Jeff Gundlach on CNBC’s Halftime show with “Friend of the Site” Scott Wapner yesterday:

We are gonna ride Gundlach’s coattails here and play his contrarian call with defined risk.  But most importantly, this trade has a nice support level to lean against, and a well-defined stop out price ahead of time to define the risk to the trade.

TRADE: TLT ($110.75) Bought July 110/115/120 Call Butterfly for 1.30

-Bought 1 July 110 call for 2.21

-Sold 2 July 115 calls at .50 each for a total of 1.00

-Bought 1 July 120 call for .09

Breakeven on July Expiration:

-Profits btwn 111.30 and 118.70, make up to 3.70with max gain of 3.70 at 115.

-Losses of up to 1.30 btwn 110 and 111.30and btwn 118.70 and 120, with max loss of 1.30 below $110 and above $120.

Payout Diagram:

[caption id="attachment_27306" align="aligncenter" width="504"]Screen Shot 2013-06-20 at 9.08.30 AM from TradeMonster[/caption]