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What an Interesting Trade! | The Mesh Report

What an Interesting Trade!

John Thomas September 7, 2017 Comments Off on What an Interesting Trade!

How would you like to get some free lottery tickets?

Except that these are better than lottery tickets.

Instead of a one in a million chance of winning some substantial dough, the odds of a big payoff are more like 50:50.

Have I piqued your interest? Are you ready to take a flier? Do you feel like rolling the dice?

It’s really quite simple.

This morning, the yield on the ten-year Treasury bond briefly touched 2.06%, a new low for 2017.

Let’s say that’s the low for the year, and that yields rise from here for the next six months, pummeling the bond market.

This would be a fabulous time to buy a long dated (TLT) March 2018 $121-$124 deep in-the-money vertical bear put spread at $1.00.

If bond yields back up to 2.40% and shave seven points off the (TLT) from today’s levels, this spread would expire at its maximum theoretical value at $2.00 on March 16, 2018.

The profit on a $10,000 investment would amount to (100 contracts X 100 shares per option X $1.00), or $10,000, giving you a six-month gain of 100%.

Not bad in this yield deprived world.

And it’s not impossible. Bond yields only touched 2.40% only last July 9.

Please see the screen shot from my Interactive Brokers platform to see how to set up this position.

Now let’s say you have a prodigious appetite for risk and want to spend some of the massive profits you earned following the Diary of a Mad Hedge Fund Trader in recent months.

Let’s say that you are willing to bet that bond yield are likely to back all the way up to the 2.62% where they traded in March.

In that case, you want to buy the (TLT) March 2018 $116-$119 deep in-the-money vertical bear put spread at $0.53.

If you are correct, and bond yields go back up to a lofty 2.62% and cut 12 points off the (TLT) from today’s levels, this spread would expire at its maximum theoretical value of $2.00 on March 16, 2018.

The profit on a $10,000 investment would amount to (189 contracts X 100 shares per option X $1.47), or $17346, giving you a six-month gain of 277.36%.

Please see the screen shot from my Interactive Brokers platform to see how to set up this much more aggressive high-risk position.

If you add either one of these super aggressive positions you are making a number of different bets.

1) The global synchronized economic recovery continues.

2) The president appoints four interest rate hawks to the Fed positions that will open up in coming months, not the doves I suggested in an earlier piece.

3) Pernicious deflation moderates, thanks to the large scale recovery spending wrought by Hurricanes Harvey in Texas and Irma in Florida.

4) Some kind of tax cut gets passed by congress within the next six months.

These may not be bets that you are willing to make with your own hard earned cash.

But if they are, the potential payoff is enormous, a lot like winning the lottery.

I am not necessarily saying this is going to happen with any certainty.

Never mind that every financial guru out there, including Warren Buffet, Ray Dalio, David Tepper, and George Soros agree with me and argue vociferously that bonds are wildly over priced, at a bubble top, and long overdue for a huge fall.

So far, they have all been wrong, including me.

I’m just sayin….



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