[Options] If it Worked There, Why Not Here?

Sean McLaughlin
May 19, 2021

We recently had on a counter-trend trade in gold that worked out (we took off the trade at our profit target this week), and we're starting to see a similar rationale and setup in bonds.

I'm going to let Steve Strazza do most of the talking here because he had an excellent riff on this in the latest R.P.P. Report:

We think Bonds could follow the path of Gold Miners higher in the coming weeks and months. This would make sense in the current environment as market participants appear to be posturing more and more defensively.

And as you can see in the charts below, it’s basically the same trade! Look at how similar Treasury Bonds $IEF look to Gold Miners $GDX as they are now testing their 2016 and 2019 highs just like GDX was when we put out our long idea last month.

For the same reasons, we would’ve been foolish not to take a shot at the miners. We want to be buying the 7-10 Year Treasury Bond ETF $IEF as long as it’s above those key former highs. The reasoning is simple and boils down to two things:

  1. Bonds are still in a primary uptrend
  2. The risk/reward is skewed heavily in the bulls’ favor. Risk is also very well-defined at the former highs near 113, which you could lump in with the second point.

But there is also another tailwind at play right now. We’re not just buying Bonds in any random environment. We’re buying Bonds at a time where markets look increasingly messy, risk assets are hitting resistance, and defensive assets are beginning to show some life. Now that makes more sense, doesn’t it?

We are long IEF above 113 with a 1-3 month target of 123.

I couldn't have said it any better than that. So how do we participate?

We're going to keep it simple here.

Here's the Play:

I'm buying $IEF September 117 calls for around 55cents. These calls are cheap enough that it makes sense to just buy the calls outright, versus some kind of spread. This debit is the most we can lose in the trade.

If $IEF closes at a new yearly low below $113, that is our signal to get out and salvage whatever we can. This would be a loud and clear signal that the downtrend is not over.

If the April bottom holds and we see some movement higher, I'll look to exit half of my position when I can do so for a double of what I paid at entry (around $1.10 per contract). This will take all of my original risk off the table and allow me to hold for any further bullish bond developments through the summer.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free!

 

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