November 28, 2023

Hi everybody, Scott Bower here from Prosper Trading Academy, and I want to show you something that we’re looking at in the bond market and then a correlation to uh TLT. TLT is an ETF that is extremely, extremely liquid. We trade options on it all the time, and the TLT is kind of representative of the 20-year bond, also very highly correlated to 10-year interest rates.

If we look at the chart that we have on the screen right here, you can see right here, just about, you know, a month or so ago, the 10-year yield that topped out right at about 5%. On the bottom of the screen here, you can see this purple line, that’s actually TLT. TLT and the bond market or yields on the bond market are inversely related, just how a price of a bond goes down when rates are going up, prices of bonds go up when rates are coming down, same with the correlation of TLT and the 10 year or the 20 year that we’re looking at.

So when I look back in TLT, and I look back to have, look at this chart right here in this Gap right in here, which is right around the 93-94 area, which was right back in September of this year, that’s the area that we’re targeting. Now, if we look at that correlation between where rates were and where TLT was at the time, okay, that’s right about here, okay, so rates were right about here, and TLT at the time was right around the 94 to 95 area. So that’s what we’re targeting. We’re targeting about 4.10 to 4.15 on the 10-e, which is somewhat near the equivalent of about 95 or so on TLT.

So we got into this position in TLT, an option position, when TLT traded right down all the way here, and like I said, that correlated right to when the 10-year hit just about 5%. And this is the position that we have, we just bought a simple call spread, the 90-95 call spread that expires in January. Again, the reason that we chose those strikes and why we were targeting up at 95 in TLT was twofold. Number one, at the time, that was about the expected move in the market in options in TLT when we put that position on when TLT was trading down here at about 84, 85 or so. And again, that 95 Target, which would be absolutely optimal, 95 or higher, that correlates right to this area right here before this big drop, and again correlates right kind of of where we were right in here before rates started to pop.

So we anticipate rates coming back down to about that 4.10 or so area in the 10-year, which the equivalent to that in TLT in our position would be right around 95 or so. Now, we had put this position on, we paid a $1.20 to buy this call spread. So, paying $1.20, if we get the Max at $5, if this, which is the max this can ever go, even if TLT goes higher than 95, the spread can still go to Five, that’s a reward to risk of $380 profit, that’s the $5 less our investment of $1.20. So, $380 divided by $120, well over 3 to 1 reward to risk, or you know, $3 that we could make for every dollar we invest, that’s uh, that’s pretty significant here, that’s what our expectations are in the ten-year and in TLT.

Thank you for watching everybody, and we’ll see you soon.

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