Indeed, when one looks at the chart above it is very clear that this has been a one way trade now for more than a couple years. As savvy technicians, of course, that always spells opportunity. Simply using our time tested 50% rule we see that prices could easily correct more than 10% in the not too distant future. Additionally, long term support (trendline) currently sets well below even that target. From a Fib retracement perspective, the corresponding OTE Long SS to this at-the-present OTE Short SS is more than $20 lower than current prices.
When I look at option premiums, I ideally want to find a situation where I can give the market a good six months to work towards my target. As well, I only want to go fishing where the current option premium is less than half what I expect the intrinsic value of the option will be when the price of the underlying hits my target. Considering our 50% level ($105) I find the June, 2013 option premiums to be extremely compelling at the moment. For instance, I can buy a June, 2013 120 put on TLT (that gives me the right but not the obligation to sell 100 shares of the TLT at $120 until the 3rd week of June) for $430. Should the market go to the 50% level any time over the coming six months that option will have an intrinsic value of more than $1500. That is more than 300% higher than current prices and represents a very interesting investment proposition. Should the market move back down into long term support (as outlined on the chart) this option will have an intrinsic value of more than $2500!
While these crazy returns are not my expectation, I believe a buy at $4.30 could easily see $8.60 over the coming months. Indeed, upon my fill I will enter a corresponding sell order to liquidate half the position at $8.70. That should get all my original capital back in my hands and leave me with a free ride on the remaining position. Should the market move the way many are expecting over the coming year, that $25.00 on the remaining freebie might not be too outrageous of a proposition.
Order:
Buy 2 June, 2013 TLT 120 Put Options (opening transaction) at $4.30 or better gtc. Once filled, place open order to sell 1 June, 2013 TLT 120 Put Option (closing transaction) at $8.70....
That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
therationalinvestor.ca
p.s. found this chart of the option itself.......adds to my interest
UPDATE May 26th, 2013
We have been working an open Put position in the US Gov't bond market ETF (TLT) for six months. The trade has come close to profit objectives but has yet to hit a level where we are to act according to our trading plan (where we sell at least 1/2 our position at double our purchase price). There have been brief windows were our Put's price has gone up materially but alas, no double. Because we are option position players, time works against us and at some point we are simply forced to act. I have a general rule not to be in an option 'position' trade with less than 30 days of life left and so the time has come to act.
CRI is going to roll out of this June, 2013 $120 Put and try to enter into the January, 2014 $120 Put.
Here is the current chart for the June, 2013 120 put (Yahoo quote link):
Since the January, 2014 option is more than $9.00 I am going to sit for a bit and let this settle down. Should we get a counter trend rally (in TLT) that brings this option's price back down into the $4.00 to $5.00 area I will simply move the capital taken out of the June options and put it into January. I will post an update to this trade should price come back down into our buying widow...
Order:
Sell 2 June, 2013 TLT 120 Put Options (closing transaction) at $4.30 or better gtc.
That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
therationalinvestor.ca
Tues. May 27th,
Filled today on this open order - sold 2 June 2113 TLT 120 Put Options (closing transaction) at $4.60 (day's opening price)...this equates to a .30 profit on the trade or about 7%. At this point I am waiting for a counter trend rally and will at that point look at the December, 2013 or January, 2014 put options and see if there is enough risk/reward in the position to justify the trade idea.
That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
therationalinvestor.ca
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