Hey There Income Hunters,
We have a big week coming up, especially after yesterday’s hourly earnings number that was up double over consensus.
Workers are needed badly and employers are paying up.
This Thursday, I expect another strong consumer price index (CPI), possibly reaching 5%.
Treasury Secretary Janet Yellen will also be auctioning plenty of bonds:
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- $58 billion 3-year notes on Tuesday
- $38 billion 10-year notes on Wednesday
- $24 billion 30-year bonds on Thursday
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That’s $120 billion of supply heading into CPI, and last month CPI was a shockingly strong number causing a smackdown of TLT…
Coincidently, the US 10-year yield and the iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) are almost exactly where they were in May heading into the auctions and CPI:
Let’s take a look at the ideal trade to capitalize on the volatility next week …
TLT Put Spreads Expiring Friday June 11
Last month, TLT dropped $5 the week of the auctions and CPI. The auction was mediocre, while the CPI was a shockingly high number of 4.2%.
Monday is the day to put on a 139.5/137.5 put spread …
The max loss is $54, compared to a top-end profit of $146, for a 270% return. The probabilities are we get to 137.5, and if we do just take the profits.
Last Time Around
Check out the TLT graph highlighting the week of May 7 below …
Now check out the TLT spreads I put on last month. This week, it’s dé·jà vu all over again.
I held two of the three spreads through expiry, and I captured the maximum $200 gross income.
The ability to let the spreads unwind naturally through expiry is a major benefit. Let me explain …
When the underlying stock settles above the higher strike of a call spread or below the lower strike of a put spread, this is how it unwinds:
Call Spread
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- The lower strike, which you’re long, you exercise and take delivery of the underlying.
- The higher strike, which you’re short, is assigned to a long and you deliver the underlying.
- In summary, you have zero position, did not pay any commissions through the process and have maximized your return on the trade.
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Put Spread
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- The lower strike, which you’re short, is assigned to a long and you take delivery of the underlying.
- The higher strike, which you’re long, you exercise and you deliver the underlying.
- In summary, you have zero position, did not pay any commissions through the process and have maximized your return on the trade.
- Bring It Home
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As #IncomeHunters our job is to ascertain the probabilities of a trade opportunity working in our favor.
Recently, as the supply of US Treasuries has increased, the second week of the month has presented an excellent opportunity to reap good rewards by holding a bearish strategy in TLT.
The vertical option spread is a very efficient way to express that strategy.
We have a big week coming up — including a couple of live events (more on those to come)!
Until then …
Live and Trade With Passion My Friends,
Griff