Whether QE2 turns out to be a good thing or a bad for stocks, bonds seem to be in a precarious situation. The trade I am opening on TLT the iShares Treasury Bond Fund is designed to take advantage of a BIG move in bonds to the downside but also has built in protection if the market surprises and bonds rally significantly. In fact, the only way we can lose money in this trade is if the market remains more or less flat around 0 by expiration.
This is an "advanced" strategy so it may take a little thinking but it is worth the effort. A back spread allows us to enter a trade with no cost (unlike a straddle or strangle) or even a small credit that still has unlimited profit potential and fixed risk. It is the best of both worlds in options but it does have risks and should be managed carefully. I went into great detail in the video to show you how to do this kind of trade and will be updating it on an ongoing basis as we decide whether it needs to be modified.
(11/1/2010 Trade Entry)
We're looking at Sonus Networks ( SONS ) today. Many stocks in the technology infrastructure sector have been hitting a support level, and bouncing up very strongly, especially at earnings this quarter and Sonus will make their earnings announcement AMC on November 2nd. The stock is sitting at a support level and starting to come up from there, so this looks like an interesting opportunity.
We're just buying the stock, rather then working with an option strategy. I went into detail in the video to show you why we're doing this kind of trade prior to an earning's announcement. We will be updating and monitoring this trade over the next couple of days as the earnings announcement is released. If you have questions or comments please ask in the comments below.
Disclaimer : It is important to understand the risks of trading options before you attempt a trade like this. You can learn more about that here. This article is not advice - it is for educational purposes only.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.