The Crazy Thinking of this TLT Bull over the last month

Someone on Twitter asked “could you imagine being long bonds right now?” I replied that it’s a tough trade to hold, and then thought I should start my blog with it this weekend. Here’s a quick trace through of my portfolio allocations to TLT and overall returns:

  1. Feb 5: 16.9% TLT calls
    1. I saw TLT calls as an interesting portfolio hedge, perhaps better than index puts, because the long bond rate would plummet (& TLT rise) due to risk-off and fed reaction if the market tanked and the massive spec shorts in the 20 year futures meant that it could go up even if the market didn’t plummet.
  2. Feb 13: 48.7% TLT calls, portfolio down 1.2% on the week
    1. I really started to like the TLT idea. It looked like it was bottoming and at any time the algos could switch from hammering bonds lower in the off-hours to neutral and maybe even to purchasing. So I made a massive bet on TLT with Jan 2023 calls.
  3. Feb 20: 47.4% TLT calls, portfolio down 8.5% on the week
    1. I actually added to my TLT position that Friday on a dip, but it still went down as an overall percentage of my portfolio.
  4. Mar 1: 45.4% TLT calls, portfolio down 5.6% on the week
    1. I decided not to add to TLT any more. I did de-risk my portfolio a bit by selling all of my way out-of-the-money IWM Jan 2022 puts off. I also sold a lot of gold miners and had covered calls expire in the money on a number of things getting me a 19.5% cash position.
  5. Mar 6: 41.1% TLT calls, portfolio down 4.6% on the week
    1. TLT rebounded slightly this week, and gold was hit hard. I had been reducing my allocation to gold miners all thru Feb, but now I started to increase it again. March I increased it substantially.
  6. Mar 12: 32.7% TLT calls, portfolio down 2% on the week
    1. On Monday the 8th, I actually sold enough TLT to reduce my allocation by 5% – mainly Jan 2022 expiry – and put the money into gold miners. TLT was hit hard later in the week as well.

Adding all that up, my portfolio is down approximately 22% since I started getting really bulllish on TLT.

During that time I tried a few gamma squeeze plays that ended up duds including FSR, PLTR, and EXPR. These followed a general pattern where I saw tons of short-dated call options purchased on a Friday, I purchased some shares on Monday afternoon, and I dumped the shares a couple days later when the price broke $0.50 or so below the largest level of covered calls. These were relatively small allocations that ended up losing around 10% each time, but I learned a bit about the patterns of these things … especially seeing some of them shoot up a couple of weeks later as whoever was pumping them apparently didn’t give up on it.

One thing it got me thinking for example was that I should perhaps allocate more into companies with smaller market caps because they are more likely to be targeted and pumped. I was looking to diversify a bit from my big allocations to TLT and Gold Miners anyway so that I’d have something that wasn’t at the bottom of the investor sentiment list. This included small allocations into Canadian battery metals miners (Lithium, Graphite, Nickel, Copper), small allocations into cannibus companies with significant US footprints, and a much larger allocation into Uranium miner CCJ because that had been my biggest winner in prior weeks. These purchases brought me from 19.5% unallocated cash to fully invested and were all thrown in on the crazy dip the morning of March 5th.

That was last week.

This week I’d been focused mainly on 2 things … watching gold futures and hoping they held above the critical 1650-1700 support zone, and watching CCJ which had become 10.4% of my portfolio.

TLT is going down a bit still, but I am still on board with Steven Van Metre thinking that the Fed has little choice but to extend the SLR exemption, allowing big banks to increase the size of their balance sheets with US treasuries, and potentially triggering an enormous short-squeeze in these bonds. I plan to ignore my TLT allocation until this plays out. Limit sells are in place on all of my TLT holdings in case of a spike, with prices assuming intrinsic value only with TLT at 160 for the March calls up to TLT at 180 for the Jan 2023 calls. Aside from that I wont be buying or selling these, just waiting to see how March plays out.

CCJ became the target for a massive gamma squeeze this week. I looked on Monday and the amount of money flooding into call options expiring on March 19 was incredible – from the $14 strike all the way to the $20 at the top of the range. I immediately bought back all of the covered calls I had sold on my shares Tuesday morning before driving to work. After work I was thinking about how best to play this at get more upside exposure. At first I figured I could buy a bunch more shares on a pullback, but it didn’t pull back. That brought me through Thursday night where I started thinking that these gamma squeeze plays that were duds all hit significant rises on the Monday morning of the week of expiry. These slightly OTM call options were still insanely cheap, so I bought a bunch at the $16.50 strike Friday morning for like $0.35 each. Near the end of the work day someone tweeted about volatility being crushed in general so I looked back at CCJ and saw that these OTM call options were still super cheap. I bought a bunch at the $18.50 strike at only $0.20/share thinking that these would likely be selling for $0.50 on Monday when the short-dated slightly OTM call options really start flying – and if they aren’t then so many contracts will be sold that the gamma squeeze could be huge.

Here’s my current allocation:

  • DOWNSIDE BETS (41.2%)
    • 32.7% TLT Calls
    • 5.7% IWM Puts
    • 2.9% EEM Puts
  • PRECIOUS METALS (30.8%)
    • 6.3% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.3% EQX (Small gold miner)
    • 7.1% SAND Calls (Small gold streamer)
    • 5.7% AG (Small silver miner w/ covered calls)
    • 3.4% PVG (Gold/Copper miner w/ covered calls)
  • COMMODITIES (18.1%)
    • 11.7% CCJ shares
    • 1.2% CCJ YOLO Calls (YOLO=You Only Live Once. Call options expiring within a week)
    • 2.1% ALB (Lithium)
    • 2.2% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (5.4%)
    • 5.4% split between CRLBF, GTBIF & TSSRF
  • CRYPTO (1.5%)
    • 1.5% LTC
  • CASH (3.0%)

The crypto play was purely based on a chart by @NorthStarCharts (twitter) showing Litecoin/Bitcoin at the bottom of an arc and suggesting that it should outperform Bitcoin substantially in coming months. I decided to take a stab at it, as I am still interested in having some of my holdings in hot sectors given my outsized position in the two most hated sectors of the market – long bonds and gold. Raul Pal from RealVision mentioned crypto again on Friday, and he had a good point … if Crypto seems to be pulling the gains from everything, why not take a small position in a coin or two and follow some charts?

Note that my fundamental view has not changed … we are in a market mania that may crash in a week or go strong for another year. I see the chances of substantial increases or drops as much higher than chances of a long sideways move. At the same time, short volatility plays such as selling covered calls and selling puts remain extremely popular among institutional investors who are desperate for anything that looks like the yield that they can’t get from the bond market.

This is a very exciting time where fortunes will be made or lost as a lot of money changes hands, and a very frustrating time for investors focusing on earnings and fundamentals which don’t seem to have any relevance to the massive market flows we are witnessing. If markets absolutely crater, then I expect my massive “Downside bets” to pay off handsomely. If they rocket higher, then my commodities, cannibus & crypto should look fantastic.

Gold is a unique play which I think will end up substantially higher in the next 2 years regardless of which scenario plays out. The COT report CFTC Commitments of Traders Long Report – Other (Combined) shows that the swap dealers are quickly shedding their short positions as managed money sheds it’s long positions. Too many speculators were long gold, and the swap dealers who functionally bet the other side have a lot of power in pushing the prices in the futures market. They could easily shake out more longs in coming weeks and potentially push gold past its 1700 support to it’s next significant support levels at 1580 and 1500 (based on consolidation periods in the 2yr chart). Sentiment has gotten pretty bad even as the physical gold sites like Money Metals Exchange: Trusted Silver & Gold dealer have many products sold out and list a substantial premiums to the spot price on the futures market. I’m still convinced that this market is relatively close to bottoming and that it will rocket higher once it turns.

Best of luck to you all, and may the odds be ever in your favor!

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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