Long-term bonds have appreciated by more than 6.5% following the Brexit vote result, together with equities. We feel that they are now overbought and that they are ready to consolidate and move lower from the current levels of $177.11.
We are buying this two-point vertical put spread 176/174 for a net debit of $781.25.
Source: Saxo Bank.
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Management and risk description
A long vertical put spread is a defined-risk strategy, and as a result our potential losses are limited. For the trade we are risking $781.25, to potentially make $1,218.75.
Buy 1 AUG 16 176 put @ 1"24 or $1,375 expiration (July 22)
Sell 1 AUG 16 174 put @ 0"37 (37/64) or ($578)
Net Debit $797 or 0.51 points
* prices are quoted in 1/64th of a point or $15.625
** 1 full point equals to $1,000
Maximum gain equals strikes (176-174): net debit equals $1,203
Maximum loss equals net debit, or $797
Target: at least 80% of maximum profit.
Time horizon: four to five days days.
— Edited by Robert Ryan