Knocking One Out of the Park

Sunday Jan 29, 2012

Anyone who has been around the brokerage business for some time will tell you never to buy an option. Leveraged futures funds are second cousin to options requiring exquisite timing to avoid the future decay of re investing the fund has to do month to month. Fail to catch the big move at the same time and one can lose money while nothing is happening. 

With that caveat, here is a comparison of TLT the bond fund that I believe is about to decline in price, and TBT a 2x short bond ETF. 

TBT should b e an inverse mirror image of TLT, and the peaks and valleys of the corresponding

head and shoulders formations, inverse for TBT, show that is the relationship. The question is, how to profit from a fall in TLT without exposing one to big risk in TBT?

Hmm, how about adding to the TBT position as it moves up?  TBT is the main panel and the chakin money flow at bottom shows increasing interest. TBT needs a close over 20 and TLT needs a close under 115 to really get things going. 

It could be that a succession of orders starting at 20 and adding as TLT falls to a predicted 106 level would limit risk and be profitable.In short, do not buy 1,000 shares of TBT hoping against hope TLT falls. One might buy 100 share purchases (or what is appropriate for your size and risk level) and add at one dollar increments at TBT rises.

I presently own 200 shares of TBT at a price just over $18.

 This is not the sort of trade we specialize in here at TMP but hey, if we are right about the timing, this could be a lot of fun. Stay tuned. Again this trade does not fit the risk profile of the target reader for this blog. It may be better to watch this from the safety of your La Z Boy.

Comments

[robert]

Investing is a process of putting your money into something with inherent value. Buying something cheap that pays a dividend and provides cash flow with the potential for capital appreciation. TBT is a BET against the future direction of interest rates.
Betting is akin to gambling and is not investing. There should never ever be any speculation in an investment portfolio EVER. The worst thing an investor can do is speculate or gamble and then by happenstance be right and make money. It then becomes a drug or cancer that will eat away your life savings.

I am disappointed that you even brought this up. A more appropriate article might have encouraged readers to be taking profits on their rising equity values and have that cash ready to buy bonds as interest rates rise.

Robert Takacs MD

[robert]

Another example of Closed end fund beating its ETF peer.

I believe you own and recommended XLE.
December 19th both XLE and BQR were at short term lows. XLE was trading at NAV since it was an ETF while BQR a closed end fund in the energy sector was trading at a 13% historically wide discount to NAV.
Since then XLE is up 10% while BQR is up 20% and both are in the same sector.

[Daniel Sipple]

This is more of an issue of knowing your limits and clearly defining your risk tolerance in regard to overall portfolio management style. The difference between an "investment" and "speculation" is subjective. Do the math, calculate your risk, and if you don't want to roll the dice, no one has a gun to your head.

This is a high risk, high reward proposition, just as prior bets on the TLT at 88.5 and shorting silver, both from this blog, both of which hit the ball out of the park. Waiting in the woods with a sniper rifle with a portion of your portfolio for these types of opportunities, for some, but not for all, can be a nice way to juice returns.

These are short term market quirks that arbitrage funds exploit with billions on a regular basis. I for one greatly appreciate learning about them from an experienced expert, who is generous enough to teach, as they occur. I might add, that in small doses, I have personally profited. In a "new normal" environment, arbitrage opportunities can be utilized, with caution, to diversify a portfolio.

While I concur, that to the undisciplined, over confident and inexperienced, a massive trade in this area with a large proportion of one's portfolio is unwise, with a small portion of one's portfolio, it can give one an opportunity to diversify via niche arbitrage. These scenarios are why the "qualified" pay 1 million with no transparency to have access to a hedge fund.

It is not the responsibility of the blog writer to govern the decisions of anyone but himself, nor is it possible in any way for him to do so. Placing responsibility for this upon him smacks of co-dependency. You have the perfect right to define your own style good doctor. You also have the right to express your opinions, parts of which, I am sympathetic with. I personally, do not wish to short my opportunities to learn from an experienced trader for fear of harming the ignorant and impulsive, for they are not my responsibility. For that reason, I respectfully disagree.

[Dennis Elam]

thanks to all who are expressing their thoughts, I believed I had enough caveats in the post to warn this was more a a paper trading experience than a recommended one.

And Robert thanks for the mention of BQR I will add it to the energy sector list.