Weekend Trade IdeaAs most of you know as the US stock market has been coming off abottom, US treasury yields have been rising on the short end. Whenbond yields rise, that means that the actual price of the bond isdecreasing. When
bond yieldrise it indicates that money is flowing out of bonds and into stocks.The Vix- the implied volatility index of the S&P 500 is alsofalling. This means that fear is subsiding and the profit urge isstarting to grow. Professional bond traders would short the US 2 yearto take advantage of this knowledge. Unfortunately retail investorscant do this or at least if you could its too much risk versus theretail traders capitalization. So how can the average retailer takeadvantage of this? By trading the Vanguard Short Term Bond ETF. TheSymbol is BSV. A short description from the Vanguard web site:
The fund employs a “passive management”—or indexing—strategy designedto
track the performanceof the Lehman 1–5 Year U.S. Government/CreditIndex. This index includesall medium and larger issues of U.S.government, investment-gradecorporate, and investment-gradeinternational dollar-denominated bondsthat have maturities of between1 and 5 years and are publiclyissued. The fund invests by sampling theindex, meaning that it holds arange of securities that, in theaggregate, approximates the full indexin terms of key risk factors andother characteristics. All of thefund’s investments will be selectedthrough the sampling process, and atleast 80% of the fund’s assetswill be invested in bonds held in theindex. Under normalcircumstances, the fund’s dollar-weighted averagematurity is notexpected to exceed 3 years.
A look at the chart shows a breakdown in price action on the
ETF.The ETF can bee shorted but I dont like to short even when the tradehas a high probability of success. A better way is to simply buy at ornear the money puts. As the price of the ETF drops your puts increase invalue, but your down side is limited. On a straight short your downsideis almost infinite.
I would buy the May 78 Strike Puts for75 cents. At the money puts give you better price action as the trademoves in your favor. This is known as "Delta". Use normal trade management i.e. scale in andif the price spikes away from you don't chase it. The chart lookssweet and if the
stock marketrallies Monday this trade will be sweet. Its about to break down to thedownside on a bollinger band volatility squeeze. Those usuallyforetell strong moves. The chart is below (scroll to the right to view properly)
Bollinger Bands (20)__Simple Moving Avg (50)__