This is a good vehicle for playing the huge rally in T-Bonds that I expect over the next couple of years. I will have more to say about this in an upcoming commentary, but for now let’s focus on possible trades to leverage it. For starters, I’ll recommend buying the September 20/August 1 118-strike call calendar spread 16 times for 0.52, contingent on the underlying ETF trading 115 or higher. If it falls below that price, lower your spread bid by a penny for each 7-cent drop in TLT. (Thus, with TLT trading at 114.93, you would be 0.51 bid for the spread.)
Our goal will be to roll the short side of our spread to a later date as each series that we are short expires. Ideally, if TLT continues to move higher, we will take in enough premium between now and September 20 to more than offset the cost of the long September 20 calls we will continue to hold. We can also parlay any profits into bigger spreads at still-higher strikes, increasing our leverage with TLT’s expected ascent.
Please let me know in the chat room how you’re faring bidding for the spread, since we can adjust our price on-the-fly if we need to pay more. Also let me know if it comes too easily — presumably off a spread order @ 0.52 — since that would imply we’re overpaying. ______ UPDATE (8:58 p.m. EDT): The spread stayed just out of range Wednesday, but you should keep trying. _______ UPDATE (July 24, 5:25 p.m.): The stock opened on a gap lower, making the calendar spread an easy buy for 0.44 (as reported by a subscriber in the chat room). I’ll use that as a cost basis for 16 spreads, but keep trying, since you may be able to do better. _______ UPDATE (July 28, 12:46 p.m.): Let’s roll into the next expiration by selling the Aug 8/Aug 1 calendar spread 16 times for 0.09 or better, good through Tuesday (but subject to a slight upward revision if TLT moves higher). By selling this spread, we are closing out the Aug 1 calls that we are short and rolling into a short position in the Aug 8 calls (against the Sep 21 calls we will continue to hold). If we are able to sell the Aug 8/Aug 1 calendar spread for 0.09, that would effectively reduce the cost basis of our bull spread to 0.35 from 0.44. Our goal is to further reduce it to zero (or less, since it’s possible to achieve a net credit on the spread by successively rolling out of each expiring weekly series that we are short and into the next). ______ UPDATE (7:54 p.m.): Before Tuesday’s opening, place a 0.06 bid to cover the Aug 1 calls we’re short. If this lowball tactic succeeds, try filling the other side of the spread at will by offering Aug 8 118 calls short intraday for perhaps 0.17 to 0.20 or more. ______ UPDATE (July 30, 2:35 p.m. EDT): I’ll assume the short Aug 1 calls were covered for 0.03, the price at which they opened. Please let me know in the chat room where you shorted the Aug 8 calls to complete the “roll” into the Sep 21/Aug 8 calendar spread. The Auggies have traded as high today as 0.13, so the spread could have been done for as much as 0.10.