בס״ד

Teenage Turkey Juice (TLT,GLD,UNG)

Posted on November 28, 2019

One item to take care of before we roll into this week’s trade.

And it goes like this –

Way back on May 30th, in a letter called Gas Rises From the Crypt, we opened a UNG trade that didn’t go as planned.  We subsequently rolled out the offending option on October 17th, and it now faces expiry.

We’re therefore taking a second evasive action to avoid a loss, and we recommend you do the same.

Recall –

We’re short one November 29th 21.50 PUT (with UNG at $19.20), and to date we have a net debit on the trade of three cents.

So…

We’re buying back the UNG November 29th 21.50 PUT for $2.41 and selling the UNG December 27th 21.50 PUT for $2.53.

We thereby purchase a month and turn our debit into a net credit of $0.09.

And now for this week’s adventure.

Since the trade war began in earnest some twelve to eighteen months ago, we’ve seen a slow and steady shift of flows into safe haven assets like Treasuries and gold, amongst others.

That momentum has waxed and waned as economic news, corporate earnings and geopolitical events dominated the narrative, but in general, the move into risk-averse assets has continued.

The following chart of gold and long dated Treasuries, as represented by the SPDR Gold Shares ETF (NYSE:GLD) and the iShares 20+ Year Treasury Bond ETF (NYSE:TLT), demonstrates the near 1:1 correlation between those two assets over the last year.

The congruency that obtains between the two is rather remarkable – TLT has clearly led the charge higher, with gaps between the two closing every few months as gold buyers splurge to keep up with the rest of the panicked masses.

Both are seeking refuge from the slow but steady global unraveling that fellow scribbler Alan B. Harvard so regularly discusses in his Climbing the Wall of Redemption blog.

In our opinion, the long Treasury/Gold safe haven trade is now looking a bit aged, but even if it has one more leg higher to run, we believe it’ll be the last.  And that means the snap-back move between TLT and GLD is now at hand.

All the more so because of the latest action in the equity market, which is fast siphoning investors from ‘risk-off’ assets back into stocks.

Take a look –

This is two years’ worth of the Dow Industrials, and it clearly shows a sideways meander that added little to investors’ pocketbooks over the period.  Save for a few unsuccessful breakouts since summer, little hope was found – until now.

And while we harbor doubts about the longevity and strength of the Dow’s current rise to 28,000, we know it’s causing great consternation among the GLD and TLT bulls.

We find it very likely, therefore, that the gap between those two securities will shortly collapse.

And we’re playing it like this –

A Jew and his Gold recommends you consider purchasing the GLD June 19th 137 CALL for $5.05 and selling the TLT June 19th 140 CALL for $5.05.  Zero premium is the result.

Many happy returns,

Matt McAbby

 

2 responses to “Teenage Turkey Juice (TLT,GLD,UNG)”

  1. Edwin M says:

    Hi Matt,
    Like your stuff.
    Like the looks of this trade, too.
    Only not sure why you’d pair it with calls instead of puts. They both look to be in a downtrend.
    Is there another way to play this?
    Ed

    • Matt McAbby says:

      Hey Ed,
      Good of you to write.
      The trade can be played with CALLs or PUTs, or, if you prefer, by buying GLD shares and shorting TLT. They’re close enough in price that you’d come away with a small credit by going this route.
      We went with CALLs because, according to the charts, Treasury outperformance looks very unlikely going forward. Should they both decline, however, it’s quite possible GLD would decline faster.
      For that reason, the CALL option looks less risky.
      We’ll see what happens.
      Keep in touch, brother Edwin!
      Matt McAbby

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