New Trade Alert for (TLT)
iShares 20 Year Bond ETF – BUY TLT March $116 Call @$7.25 or less
Risk Rating: 2.5 (1 = lowest 5 = highest)
Above Break Even Probability: 50%
Max Loss Probability: 25%
INTERESTing Rate Rally…REALLY REAL RISK REWARD PLAY?
The chase for yield has made equities the chosen investment as the safety of Treasuries is no safe haven payoff. Extremely low rates will not last forever but most likely a lot longer than everyone thinks with movement later as opposed to sooner.
The Fed forecast for the December hike is nearly 100%, what happens after that is in doubt, maybe hike again in May and December 2016 according to the Eurodollar futures market ladder, but the long term interest rate markets are pricing in a fast and furious reversal with the new administration increasing inflation.
The highly watched 10 Year Note has jumped from 1.50% to nearly 2.5% in just a few short weeks.
TOO FAR TOO FAST is my fear…The END IS NOT NEAR…for stocks…or for lower interest rates.
The TLT Bond Exchange Traded Fund has tracked from 100 to 140 in the last 5 years. The 120 Midpoint is SOLID support to lean on as optimists may have gotten ahead of themselves thinking rates are moving higher soon.
In addition BULLISH DIVERGENCE has seen new price lows WITHOUT new highs in volatility possibly signaling that the sellers are getting tired.
The Bond price versus yield is an inverse relationship so when buyers move into the safe returns that drives price up and rates actually down. Global events or a stock pullback can increase this demand for bonds so a long play is also a stock market hedge.
The first upside goal in TLT is a halfway retracement to 130 which was also the last consolidation.
An ETF/ Stock substitution strategy using options ties up less capital and has risk absolutely limited to the premium paid. An option, instead of buying the shares also has greater staying power for long term trend development.
The March option has over three months for Bullish development.
An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A TLT long call option can provide the staying power compared to a stock purchase trying to pick the bottom. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from only modest directional moves.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With TLT at $121.50, for example, an In The Money $116.00 strike option currently has $5.50 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the TLT March $116.00 Call at $7.25 or less. Only a close in TLT below $117 on a weekly basis or the loss of half of the option premium would trigger an exit.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying ETF/stock with a much less money tied up in the investment. The Delta on the $116.00 strike call is 75%.
The March option has over three months for bullish development. This option is like being long the stock from $116 price not seen since the 2015 summer extreme low, with completely limited risk.
The maximum loss is limited to the $725 or less paid per option contract, with a stop at $350. The upside, on the other hand, is unlimited.
The TLT option trade break even is $123.25 or less at expiration ($116.00 strike plus $7.25 or less option premium).
If shares hit the $130 price midpoint target of the $140 to $110 range the option would be worth $14.00 for a 100% return on investment.