Trade of the Day: UltraShort 20+ Year Treasury Fund (TBT)

by Ken Trester | December 26, 2013 9:48 am

Trade of the Day: UltraShort 20+ Year Treasury Fund (TBT)

Each week, I run an intensive scan of the options market to find the best credit spreads to write for high income. These positions provide more than an 80% probability of earning full profits — can you say that about your portfolio?

Every month, I look forward to options expiration because it’s a major pay day. Recently, at December options expiration, my Maximum Options members rang in eight big winners when our credit spreads expired worthless and we kept 100% of the premium we collected in credit spreads on Ciena (CIEN[1]), Disney (DIS[2]), Dollar General (DG[3]), Home Depot (HD[4]), Joy Global (JOY[5]), Viacom (VIAB[6]), YRC Worldwide (YRCW[7]) and the UltraShort 20+ Year Treasury Fund (TBT[8]).

And you read it right: We won because our options expired worthless. To the typical options trader, an option that expires without value is a complete nightmare, but not when you’re using options for credit spreads. I’ve been writing credit spreads for decades and  there are more than[9] a few places for you[10] to check out the basic mechanics[11].

But after you’ve done some research and you’re ready to start profiting, here’s a brand new credit spread I just recommended to get you started in one of my top credit spread candidates: the UltraShort 20+ Year Treasury Fund (TBT).

TBT is an exchange-traded fund (ETF) that moves twice the inverse direction of long-term Treasury bonds. In other words, if bond prices fall (and interest rates rise), the price of TBT will rise. TBT had been in a steady uptrend over the past month with its 50-day moving average providing solid support, but that support failed to hold during a sharp sell-off recently.

Nevertheless, support still exists in the $73.70 area with its 200-day moving average. And following the Fed’s announcement that it will begin to taper its bond purchases, the general trend of long-term interest rates should be higher.

Here is the information you need to know to open the UltraShort 20+ Year Treasury Fund put credit spread:

Use a spread order to sell to open the UltraShort 20+ Year Treasury Fund (TBT) Jan 73 Put and simultaneously buy to open the TBT Jan 70 Put for a spread credit of 30 cents or more.

It’s important to understand that a put credit spread is a bullish position in which you want the stock price to stay above the upper strike price of the spread. Use an auto-stop order to close this position if TBT trades below $72.50 prior to January options expiration and you do not want to buy the stock. If you do not close the position and the TBT Jan 73 Put expires in the money, you will be obligated to buy 100 shares of the stock at $73 per share for each credit spread contract you open.

This position generates a 10% return on margin (120% annualized) for a four-week holding period. Your maximum risk is $270 per contract.

With numbers like these, it’s easy to see why options credit spreads are among my favorite trades.

InvestorPlace advisor Ken Trester[12] brings you Power Options Weekly[13], which delivers 5 new options trades to you each Friday. It’s the perfect ‘bridge’ between investing in ordinary stocks and the turbocharged world of options trading. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95[14].

Endnotes:
  1. CIEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=CIEN
  2. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  3. DG: http://studio-5.financialcontent.com/investplace/quote?Symbol=DG
  4. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  5. JOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=JOY
  6. VIAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIAB
  7. YRCW: http://studio-5.financialcontent.com/investplace/quote?Symbol=YRCW
  8. TBT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TBT
  9.  there are more than: http://investorplace.com/2008/02/how-to-initiate-a-credit-spread/
  10. few places for you: http://investorplace.com/2010/05/credit-spreads/
  11. check out the basic mechanics: http://investorplace.com/2010/04/put-call-parity-how-to-use-credit-spreads-and-debit-spreads-to-take-advantage-of-mispriced-options/
  12. Ken Trester: http://investorplace.com/2011/06/author/Ken-Trester/
  13. Power Options Weekly: https://order.investorplace.com/index.jsp?sid=WRC177%26uid=208.250.100.2-1292420591507798
  14. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95: https://order.investorplace.com/?sid=AI8201

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