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Investors have already started moving money out of the bond market and into stocks, and that is probably one of the reasons for the rally we’ve seen since Election Day. However, I do not think that rates are going to go up that much unless there is a burst or a black swan event of some kind, which could change all of that very rapidly.
We are currently experiencing bubbles in bonds, stocks and the U.S. dollar, the last of which has nearly brought the euro to parity with the dollar. Stocks are at valuations that have only been seen a few times in history, which is another negative, and the interconnectedness of these different markets could cause some serious pain if any of these bubbles are pricked.
With this in mind, today I’m recommending a bearish trade on PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), a put debit spread:
Using a spread order, buy to open the UUP Mar. 17th $26 put and sell to open the UUP Mar. 17th $25 put for a net debit of about $0.30.
Note: Be sure you are opening the monthly options that expire on Friday, Mar. 17, 2017.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
As I alluded to before, I think the U.S. dollar is at excessive highs and will correct. For this trade, we pay a small enough premium that, with the $1 spread between our strike prices, we get about a 2:1 profit ratio.
Ken Trester is editor of the popular Maximum Options program. 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.