We hold a tracking position consisting of 200 shares @ 133.00 held against ten puts spreads. Specifically, we are long Feb 20 132.50 puts against Feb 20 130 puts for an average debit of 0.06. The spread has the potential to widen to 2.50, effectively giving us 40-to-one odds on weakness such as actually occurred in the past week. At Friday’s settlement price of 130.98, our position was showing a paper profit of about $740, with potential to tack on an additional $800 if TLT is trading at 130.00 at expiration. A significant rally over the next two weeks would also increase the profitability of our position. Most immediately, the stock (ETF) looks bound for the 130.17 target shown. Any lower, however, would put in play a worst-case target at 129.59 that comes from sliding point ‘A’ up to January 30’s 138.5o peak. The higher pivot can be bottom-fished with a tight stop-loss if you hold no position or want to scalp against our existing ‘backspread’. Since we were looking to buy on weakness, the lower target should be used to aggressively stake out a new long position. _______ UPDATE (Feb 10, 12:44 p.m. EST): Longs acquired this morning at 129.59 should be tied to a tight, 129.43 stop-loss that should be kept active at night. I’ll also suggest selling the 200 shares of stock held against our put spreads if 129.43 is touched. I am taking this precaution because March T-Bonds, currently trading for 146^22, looked primed to fall to 145^20. _______ UPDATE (12:55 p.m.): If TLT ratchets lower, you should look once again to bottom-fish aggressively at 127.58. Here are the coordinates that produced that target (30-minute chart): A= 134.99 on 2/4; B= 130.50 on 2/6; and C= 131.98 2/9). _______ UPDATE (8:11 p.m.): The stop-loss and the bottom-fishing strategy noted above remain valid. TLT can move pretty good at night, so you’ll need to either monitor the stop closely or set it on autopilot. The way TLT finished the day, I wouldn’t be surprised to see it get pasted in the after-hours. _______ UPDATE (Feb 11, 11:22 p.m.): We’re out of the stock for the moment, since today’s low touched 128.96, but we still hold the put spreads. Let’s try to get the shares back, but cheaper, with a 127.65 bid. Imputing today’s loss on the stock to the value of our puts spreads will effectively raise their cost basis by 71 cents, to 0.77. There is still $1800 of potential profit in it.
