Get Ready for Inflation Shock No. 2

Hey There Income Hunters,

We are heading into what I like to call the Zone of Preparation for the next set of employment numbers, Consumer Price Index (CPI) and the 3-, 10- and 30-year Treasury auction.

It all begins on June 4 with “Employment Friday,” and I will have you ready to capitalize on another iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) meltdown.

Last month, Power Income cashed in on 200%-plus returns within that two-week window and I am starting to accumulate a similar position now

Here is the backdrop to what is coming …

The U.S. is crushing it on vaccination and reopening efforts. Continued progress will support a solid economic recovery as the return to normal builds external demand for goods and services.

This environment continues to be mostly negative for bonds and bond ETFs like TLT, PIMCO 25+ Year Zero Coupon US Treasury Index ETF (Ticker: ZROZ) and Vanguard Extended Duration ETF (Ticker: EDV)

Today I’ll let you in on the trades I have initiated this week to get prepped and share my current portfolio.

TLT Time

Last month, TLT rose for a couple of weeks before the employment report. Post-report the market began worrying about CPI and the Treasury supply. I think we’re starting to see a replay of that.

The 139-141 area is where I want to set up bearish option strategies and 135-137 is where I want to close out trades.

The chart below illustrates May’s range. Having a chance to set up the short again in June would be a great risk/reward scenario.

Low Risk/High Reward TLT Trades

On May 16, I purchased 139.5-/137.5-strike vertical put spreads to June 11, 2021, expiry …

Vertical spreads work incredibly well for a low-volatility ETF like TLT. Its at-the-money vol is 12% and the straddle to June 11 shows a $3 move into expiry — so I chose the two strike-wide put spread for this trade.

Having the CPI number released on the Thursday prior to expiration is ideal. I expect we will see another high inflation number — possibly up to 5% — which should send TLT back down to the bottom of the recent trading range (135-137).

If that happens, the options will expire in the money, capturing the full $2 strike on capital-at-risk of $80 on average. That is a good risk/reward based on such a tight $2 strike difference… 

Job Market Turnaround

Downside risk in the jobs market will now shift to upside opportunity as the reopening will create demand for workers throughout the summer.

I will look to either add to the put spreads or look to buy outright puts next week prior to the employment number — then add on a stronger jobs report.

Remember: be aggressive when you have Inflation, growth and Treasury Supply as tailwinds for your trade.

Bring It Home

The auction strategy alone is a low risk/high reward approach. But when you combine it with an upward trend in inflation and jobs it gets even better.

I will consider other ETF alternatives next week, as well.

Until then …

Live and Trade With Passion My Friends



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