Trade Update $TLT: Closing Dec Weekly Puts for A Double

by Dan December 18, 2014 2:23 pm • Commentary

On Tuesday prior to the Fed meeting a placed a very short term bearish trade on the TLT with the thought that the commentary would calm some of the current fears in the market, and bonds could pull back a bit from the recent re-test of the mid October panic high.  That has obviously happened, sending equities up 5%, but the problem with the trade from where I see it is that crude oil has not stabilized.  Crude has given back all of its gains over the last couple days and I fear that could reverse some of the equity gains and give a bid to bonds.  My trade is worth a double, and I am going to take the gain and move on.  A double in two days beats a sharp stick in the eye.  An alternative to closing could be selling a lower strike put and reducing the break-even.  But I am not messing around, new lows in crude tomorrow could cause a bit of a stir again in the stock and bond markets on a expiration Friday.

Action: TLT ($124.40) Sell to Close Dec 26th (weekly) 126 weekly put at 2.05 for a 1.05 profit



Original Post December 16th, 2014:  New Trade $TLT: Bonds On Steroids

The yield on the 10 year Treasury almost got to 2% this morning, down from 3% at the start of the year, and the TLT (the iShares 20yr Treasury Bond etf) nearly matched the October 15th panic high of $127.68 this morning.  The TLT certainly looks a tad overbought in the very near term in front of the potential for the Fed to remove their low rates for a “considerable time” language tomorrow, when they conclude their 2 day meeting. Yes a tad overbought, despite the velocity of the oil price decline and that of what appears to be a spiraling out of control situation in Russia.

It is my sense if the Fed were to remove the language, and the recent downward volatility were to have already discounted the potential that the Fed is in fact on pace to raise rates in mid 2015, then we could see a little re-tracement in bonds in the next couple of days/weeks as we head into what should be a bit calmer Holiday trading.

Looking at the chart of the TLT, it seems that there is an air pocket in between $126 and $123 that could easily filled in:

TLT 1yr chart from Bloomberg
TLT 1yr chart from Bloomberg

I want to make a very short term contrarian bearish bet on bonds with defined risk.

TRADE: TLT ($126.55) Buy to Open Dec 26th (weekly) 126 weekly put for $1.00

Break-Even on Dec 26th (weekly) Expiration:

Profits: below $125

Losses: of up to 1.00 between $125 and $126, max loss of 1.00 above $126. or less than 1% of the underlying etf price

STOP: going to know very quickly if I am wrong and will look to close at a 50% lose