A Treasury Bond (TLT) Longshot Trade

A Treasury Bond (TLT) Longshot Trade

We dedicated the better portion of this week’s Wall Street Elite letter to the basics of trend-watching and the best options to play on the long side.  The TLT trade we’ve come up with today precisely fits the mold as we laid it out in yesterday’s article.

We concluded in that article that it was superior to select a security that was in the midst of a bull market but was about to undergo an intermediate term retracement. For a number of reasons (that we won’t repeat here), we suggested that the best returns came from buying PUTs on that security, and for those interested we recommend you look here to get all the details.

But before we get into the specifics of this TLT research and trade idea, we have two trades to report from last month’s options expiry that somehow got overlooked.

Pens at the ready!

We’ll start with a trade we opened on the 25th of November in a letter called It’s All up to You – and the Trades You Make. At the time, we bet on a pairing that pitted the SPDR S&P Homebuilders ETF (NYSE:XHB) against the Global X Social Media ETF (NASDAQ:SOCL), buying PUTs on the former and selling them on the latter. The XHB PUTs cost us $0.56 and the SOCLs banked us $0.50. They both expired worthless, leaving us with a loss of $0.06 on the trade.


The second trade was launched on the 6th of January, in a letter entitled Houston – We have a Situation. There, we recommended you consider the purchase of the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) February 167 PUTs, then trading for $1.96.

After that, it got complicated.

On February 3rd, in a letter called Underground and Behind the Scenes, we informed you that we didn’t like the looks of the trade. Expiry was approaching, and we were downright worried about taking a loss. We forthwith sold the PUT in anticipation of a brisk move higher that might leave us with a goose-egg. The PUTs were then going for $0.91, so, at the very least, we got out with something.

But it didn’t end there. We took one additional step. If the reversal was imminent, as we believed, then it behooved us not just to close out the existing PUT, but to sell two more and pocket the premium while we had the chance.

And so we did.

Home. Run.

We took in $2.73 total from the three PUTs, they expired worthless at the February deadline, and we brought home a healthy $0.77 profit (2.73 – 1.96), or 39% in six weeks.

Bringin’ Home the Bacon!

A nice little total profit from those two trades, even if one didn’t go in our favor.  Such is life in the trading world!

Now, let’s get back to the idea we mentioned above of an open PUT purchase on a security that appears to have topped.

Hard work and profits

We’ll preface our remarks with a quick word about the dangers of trying to pick a top to any market, but specifically the bond market.

Bonds, in our opinion, are coming to the end of a thirty year secular bull market, the top of which is proving to be a most difficult call to make. And it stands to reason that after thirty years the rollover to higher rates and a bear market in bonds will take some time to play out. For our part, we’ve been talking about the inevitability of a top for three years now, and last year we twice failed to pinpoint it.

The thing has legs.

All that notwithstanding, we’re going to examine once again the long bond’s technicals with an eye toward determining an interim top, at the very least, and potentially something more significant.

Take a look here to start –

TLT Chart

This is a weekly chart of the iShares 20+ Year Treasury Bond ETF (NYSE:TLT), a reasonable proxy for the U.S. long bond.

And what does it show?

The most salient feature of the chart is the overbought RSI read that was registered in January (red circle). Only twice in the last decade were such readings were recorded, and the market sold off dramatically in the months that followed. The first was in December of 2008, the second in the fall of 2011.

After the latest overbought reading, RSI fell precipitously, bounced off its midway ‘waterline’ and has now begun a second approach to that all-important threshold level (black box). Should it once again submerge, we’ll very likely experience an extended bout of selling – similar to what we encountered in the fall of 2012, when weak weekly RSI numbers became a harbinger of more than a year’s worth of selling.

Compounding the likelihood of that transpiring is the weekly MACD indicator, which crossed lower in mid-February and is now declining toward its waterline, as well.

We’re still some ways away from MACD confirming RSI’s plunge beneath the waves. But if we’re correct on the turn here, there should be significant gains to be had from setting the trade today and waiting for both of them to take on water.

From Weekly to Daily

We now move to a daily chart for TLT, where the picture gains some additional color.

TLT Daily Chart

We’re focused primarily on two indicators here.

The first is the daily RSI (in black), which could go sub-waterline as early as today on any weakness. MACD, too, appears only a few days away from confirming that weakness, and should we see both in the drink, we’ll likely get a surge of technical selling that will drop TLT down to her rising 137 day moving average (in blue).

And that’s the second, and perhaps more important gauge in our sights.

At the beginning of March, the 137 DMA acted as strong support for TLT. A second test of that line, however, as both RSI and MACD submerge below their respective waterlines, could prove fateful.  And profitable, if you know how to trade it.

Here’s how we’re going to capitalize on this…

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We believe a cheap, out-of-the-money bet on even a reasonable likelihood of a TLT pullback is worth the speculative funds devoted to it.

Options Trader Elite therefore recommends you consider the speculative purchase of the TLT December 112 PUT, now trading for $1.62.


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We believe a cheap, out-of-the-money bet on even a reasonable likelihood of a TLT pullback is worth the speculative funds devoted to it.

Options Trader Elite therefore recommends you consider the speculative purchase of the TLT December 112 PUT, now trading for $1.62.


With love of the hunt,

Hugh L. O’Haynew, Normandy Research

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