If you like to keep things simple, then you’ll despise the following trade. But if you’re not scared about a little complexity and are interested in some ideas, then read on. The basic premise that I’d like to express in a trade is that US Treasuries are overbought and due for a pullback. You could sell the ZB future or short TLT, but these scenarios expose you to unlimited risk (more or less). You can place a “quote” – stop – on your trade and thereby console yourself that you have defined risk, when really you’ve just described how much you are going to lose.
No, we are going to go all-in on this trade and sleep (comfortably) in the bed we make. The risk (amount we are willing to lose if we’re wrong and US Treasuries skyrocket to the moon) is the amount we are going to pay for an in-the-money (ITM) call. We need to choose an underlying that goes up when we are correct, so we need an inverse ETF. For our purposes, we will use TBT. Buying the SEP 25 call for $5.20. We are exposed to a little time-decay, but not stupid like if we were to buy out-the-money (OTM) calls. Three weeks until a decision is made for us, if we chose not to take it off before then.
Note: though I like to blog entries, I’m not likely to blog the exit so please follow me on twitter if you are interested in my exit.