It feels like the fear that gripped investors and traders alike about the market is subsiding. During the panic many people fled to the safety of U.S. Treasuries driving yields down to ridiculously low levels. Another bubble was created and we can profit from its deflation. With the recent rally and the feeling that we're at a bottom, at least for now, money is being put back to work in the market and also in corporate debt.
As people leave Treasuries the yields on bonds move higher and the value for those holding at lower levels goes down. TBT is a play on the yields returning to normal levels or reverting to the mean.
Consistent with my preferred method of trading I'm looking at selling out of the money puts or possibly writing covered calls on this issue. As of the time of this writing the just out of the money January puts and calls are paying a nice return considering there are only 8 1/2 days left of trading during this expiration period.
It may be smart to wait for a pullback in the stock market as we may be in overbought territory. When the market inevitably pulls back as traders take profits it may be smart to reassess the fear factor and make sure the herd doesn't flee back to Treasuries. With these insulting yields I don't think they will. I believe the herd's greatest fear will be that they're missing out on the stock market rally. Historically, they will come back to play after they miss the greatest leg up.
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Good Philosophy
Thank you and thanks for the post.
Merrill Lynch exec. on Bloomberg, just said shorting treasuries, is a "no brainer".
uh oh, maybe I should reconsider...those talking heads are usually wrong :)
Actually the part I'm most worried about is the Fed buying treasuries to keep the rates low and the bubble from popping...
Hey
When you write put (ex. for GDX), is it a covered put or uncovered? Thanks.
In all IRA accounts they are cash covered. In taxable accounts I can choose whether to write puts naked or covered. The GDX puts I wrote were technically naked because although there is a lot of cash in the account there is not enough to buy all the stock of all the puts I've written on GDX and others if put to me.
I hope that answers your question adequately and thanks for stopping by.
I think shorting TBT is "fighting the FED," and would only consider it if the long bond rallies back to the highs, and then sell OTM calls on the bonds or puts on TBT. I assume Bernanke means business with his helicopters, and this is one of the most powerful of his Helos.
jb, thanks for stopping by. What do you think of selling Feb 38 or 39 puts? Do you think treasuries can rally enough so that the seller can get hurt on these?
If the market comes to me, which I presume it will, I would consider selling the 34's when TBT is 36. Maybe too conservative, but I only want it the way I want it.
jb, great point. I think it's bullish for TBT that there wasn't panic fleeing to Treasuries today. The week is still young though :)
If you make a rough estimate of -4% CPI for Q1 2009 and -1$ CPI for Q2, along with the Fed holding rates down until at least the second quarter, current yields are in line. The real opportunity was shorting the bond in the 2.6 range a few weeks back.
Firms should be revising down earnings estimates, and goodwill writedowns will probably have an unexpected impact on firm valuations. I don't see any reason for the next six months for earnings expectations to pick up, so I doubt treasuries have much downside at this point. This play will probably make sense around the middle of 2009.
In addition, TBT has been trading at a significant premium over NAV.
Thank you for your well thought out comments. I'm still of the opinion that one could write pretty far out of the money puts on TBT and not get hurt. Maybe they should be written at the middle of 2009 strike prices like you suggest.
Thanks for stopping by.
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