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The Bear Market in Treasury Bonds Takes a Breather
I have been a huge bear on the Treasury bond market, much to the delight of my readers for the past six months, who have made fortunes from this advice. I know that I have said that you must sell every rally for the next ten years. But markets have to breathe, and nothing ever moves in a straight line.
I therefore believe that the bear market in bonds is about to take a brief rest. Ben Bernanke’s QE2 has resulted in massive buying of long dated Treasury bonds, and I think he will be sitting on the bid all the way up to the last day of the program on June 30. This will provide some support for bonds for at least three more months.
I also think that all asset classes generally, and equities specifically, will be subject to some profit taking and a “RISK OFF” trade in coming months.
This could generate a flight to safety bid for government paper. It won’t be off to the races for Treasuries. I’m looking for a rally of only a handful of points. That is why I’m not bothering actually going long bonds. Perish the thought. Take a look at the chart below, which shows that a short term “head and shoulders” bottom may be developing for long term Treasury bonds. This is what the markets are struggling to tell us.
I happen to know that several big hedge funds are taking advantage of these market conditions by selling short near dated puts on 10 and 30 year Treasury bond futures. The June and September 110 strike seems to be attracting particular attention. One of the purposes of this newsletter is to keep you informed about what the big boys are doing. This is what they are doing. We are running a fairly light book these days, so you should have plenty of room to accommodate a trade like this. If you are lacking clearance for level four options trading and are unable to execute a trade like this then just watch and learn.
If you are unable to short the puts outright, you might consider buying the (TLT) on a dip outright, with an eye towards picking up a few points. But keep in mind that this is a higher risk lower return trade, the kind I try to avoid. It also requires a pretty fine ability to trade the market short term, which may be beyond the means of many of you. A long position makes nothing at all if the (TLT) doesn’t move, while the short puts trade reaches its maximum point of profitability.
The best case scenario for the short put trade is for the Treasury bond market to hold it together for three more months, and then go to hell in a hand basket after your short puts expire. Then you can merrily skip back over to the short side and reinvest your new profits.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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shorting puts? you mean you can borrow money to sell a highly leveraged instrument. why not just leverage up on going outright on the in the money calls?
I have read his posts for 3-4 months. I dont see how he is better. He is mostly good in annoying bragging about himself and advertising his newsletter (the price of which moved from 179 a quarter to 279, last time I listened). , in addition to luncheons. Don't misunderstand I am not against professionals charging, or peddling their stuff. But this guy does it too obviously , and brags too much, and this ZH shouldnt be place for it, -under the disguise of cotributor-.
Just buy puts on TBT, double inverse.
That was my play for the past 4 months. Bought $90 strike June 11s and Jan 12s. TLT made a steady march down, but for some reason puts have eroded at the same rate. Still at break even and even down a little. best to short TLT outright I think. Any option experts can weigh in here.
EDIT: sorry you posted TBT, my puts were on TLT.
Because of time erosion on options you want to be selling, not buying premium. For example, I'd sell the Bull June 94/96 bull call spread on TLT, collect the premium (noticed I'm hedged in this trade at the 96 strike level, and then let time erosion work in your favor. Remember, always sell premium or buy spreads to reduce or eliminate the effect of time erosion in premium value. (Notice, that TLT doesn't even have to move down for you to make money with this strategy)
However, I expect a EU banking crisis sometime this summer (sell OTM calls on European banks), so I wouldn't bet against treasuries right now. Wait until the big summer panic rally out of equities and into bonds.
about to take a brief rest? youre about a month late.
+1 guess ABC correction just ended last week
It's probably not that simple. This rally from the February low should be a #4 triangle - abcde. Mkt's probably now near the end of the 'd' swing and preparing for an 'e' up to 126-26 (spot month).
[edited 'e' terminal point]
exactly. Marc Faber called this before any turmoil. He said we were 'oversold' in the short-term for the next several months, but that bonds long-term were suicide. He was exactly correct.
come on, MHFT. you're better than this. do not brag about how your clients have made fortunes off of being short bonds (obviously trending lower) when they've recently given back large profits. its obnoxious, dude, and you're better than this.