TLT got savaged yesterday, allowing subscribers to easily complete a vertical put spread that I’d recommended earlier. Last week, when TLT spiked to within pennies of a major Hidden Pivot rally target at 138.42, we bought Feb 20 132.50 puts for 0.40. This week, with the ETF falling sharply, we shorted Feb 20 130 puts for 0.34. This gave subscribers a 2.50-point vertical put spread (x10) with a cost basis of 0.06, and therefore a maximum possible loss of $60 on the ten-contract position. If things go our way and TLT’s weakness lingers, we stand to make as much as $2440 on the spread. Some subscribers could do even better, since they sold half of the original position for twice the price paid, leaving themselves with naked puts that effectively cost them nothing.
I’ve been extremely bullish on TLT for months, and we’ve profitably legged into bull call spreads numerous times as the stock has risen. We took the other side of the bet this time simply because we could get great odds — in this case 40-to-1 — just for turning bearish for a couple of weeks. My current downside target is 133.00, and it will become an odds-on bet if TLT slips below the 134.40 midpoint ‘Hidden Pivot’ support shown in the chart. I’m recommending bottom-fishing aggressively down there, using profits from the put position to cushion a stop-loss. If TLT reaches the target, it will have fallen slightly less than 4% from the recent all-time high. Experience has taught us that corrections in this vehicle don’t last long and that we should treat any bout of weakness stretching to more than 2-3 days as a buying opportunity. This correction could surprise by being nastier than anticipated, but if so, the put position we hold will allow us to take it easily in stride. _______ UPDATE (8:51 a.m.): In trading before the bell, TLT has bounced 41 cents after diving to my 133.00 target and bottoming there to the exact penny. Those who hold the put spread ten times can buy 200 shares as an offset, since, at 133, each spread carries a delta value of about negative 20 shares. We can’t do any option offsets because the options don’t trade until 9:30 a.m. _______ UPDATE (Feb 5, 2:16 a.m.): So far, TLT has bounced a whopping $2.47 from a low just 6 cents from the 133.00 target I’d furnished above. If you followed my advice and bought stock against the put spreads, this would have racked up an additional $500 gain on top of the $500 paper gain currently in the spread position. _______ UPDATE (11:05 p.m.): TLT suffered a serious setback yesterday, falling as low as 133.11, but notice that the put spread protected us well: It was worth $800 — all of it theoretical profit — at the close. It will gain in value if TLT falls lower. From a technical standpoint, a downside target at 132.09 would be in play if 133.06 is decisively breached.