Friday, October 15, 2010

T-Bond Short Round Trip

Per Independent suggestions, today we rung the cash register as we completed our first round trip in our short of 30-year T-Bonds using the TBT 2x Short ETF. Let's review the trade and think about what comes next.

The suggestion was to tip-toe into a short position by buying lots (100 shares) to build a core position. First, the suggested order before market open was

Buy 100 TBT Limit Price 32.50 AON

and on that morning, TBT opened at 32.47, so we remember that price. It was suggested to buy a number of lots equivalent to 25 percent of the overall core position.

Second, in that same posting, Independent suggested "we are only starting a minimal short position, ready to add to it only when prices are much lower for TBT, say, below 30..." If this was followed, this order would have been placed:

Buy 100 TBT Limit Price 30.00 AON

and some days later would have been filled, resulting in an average purchase price of 31.235 -- (32.47 + 30.00) / 2, representing 50 percent of a core position.

Third, in an update in the comments section of the same article, the suggestion was to take profits on this TBT position if TLT (a long bond ETF) dropped to 100. Well, today it did and ca-ching, we rung the cash register. At that point (when TLT penetrated 100 moving down), TBT was at 34.35 which is therefore our nominal sale price.

In sum, we are now flat (no position) in TBT and have booked a profit of 3.115 points (34.35 - 31.235), which represents a 9.97 percent gain on funds invested. In dollars, these 3.115 points represent $311.50 per lot traded. If you had a minimum position of two lots, that would be $623 profit minus commissions.

For the record, let's calculate the commissions using Scottrade's $7 rate. We have three trades -- 2 buys of 100 shares each, and one sale of 200 shares. That is $21 (3 x 7), so the profit is just above $600 counting commissions (in a trade where a significant part of $6000 in funds was at risk).

Notice that a person doing the above with 10 times the funds, would have netted $6230 (10 x $623) minus $21 commissions. I mention this only to point out that broker commissions are a trivial part of the equation, even with 100 share lots, but more so with larger volume (number of lots). That is, whether it is 2 lots or 20 lots, the total commission for the transactions is the same -- $21.

For the future, the suggestion remains more or less the same -- tip-toe into a TBT (short long T-Bonds) position. Here are two orders you can place right now to get back in, so to speak:

Buy 100 TBT Limit Price 31.50 AON

Buy 100 TBT Limit Price 28.50 AON

Should both be filled, one would have a 50 percent core position with average price of $30. This is going to require a significant dip in the S&P500 and/or some more money printing by the Fed (Google "quantitative easing"). By taking profits above, we now have a liability -- holding fiat currency cash, which can depreciate fast at about any time. But so it must be, to have funds in reserve for opportunities that may arise.

Our physical gold and silver positions are way ahead. Of course, the strong recommendation is to take physical delivery. However, CEF is a gold/silver fund where shares can be purchased in a brokerage account. At present, it is near all-time highs so you want to look for pull-backs before any larger purchases.

FAZ (short big banks) is perhaps ready to make significant gains as people realize that the target price for these bank stocks is zero. Remember, when a bank is liquidated, the common share holders are likely to get approximately nothing. The recent news on mortgage issues and open talk about "breaking up too-big-to-fail" banks is definitely bearish (favorable for FAZ). Before long, lamp-posts in New York, London and elsewhere will start to have names affixed to them -- one for each banker to be hanged. Speculation revolves around the question: are there enough lamp-posts?

Our suggested SDS position (short S&P500) is a bit underwater trading about 10 percent below our purchase price. If you did not do this short (buying SDS), you can start it now at even better (lower) prices. If you do not yet have a full core position in SDS you can price-average down by adding one or more lots at present levels.

However, in none of these positions should one overextend oneself risking margin calls where you are forced to take a loss. Remember the gambler or the amateur both have a tendency to "bet the farm" with get-rich-quick delusions. These are the folks that loose their money fast because they are "weak hands". Indeed, the sorts of trades recommended here are often designed precisely to find and challenge the weak hands.

One such case is "price-chasing" which can result in buying at the highs. Indeed, I've mentioned various gold/silver mining stocks and also DBA, which is mostly grain/food commodities. Both have rallied a lot but I have not yet made specific recommendations since in this forum, I'm looking for quite safe entry points (that is, price dips). And this is where my own activity differs from suggestions here. I have been long gold/silver stocks and DBA since their lows in 2009. If readers are interested in those sectors, I'll keep looking for a reasonable entry point to suggest. For now, all I can say is to tip-toe into positions on big down days.

Here are some of the gold/silver mining stocks I now hold or are on a buy list at price dips, in alphabetical order:


© 2010 James J Keene

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