If you’ve never experienced turbulence on an airplane, I can tell you, you’re not missing much.
It rattles your insides, makes you feel like you’re going to fall out of the sky, shakes the interior of the plane such that you think the whole thing is going to shatter.
Truth be told, I’d never really experienced what many would call a turbulent flight until last year. That white-knuckle, stomach-dropping moment was only helped by the Captain’s warning a few minutes earlier — but at least I knew it was coming.
Turbulence — it’s what many investment strategists are calling for in 2015.
Simply put, the crosscurrents and trends that are overwhelming the outlook for 2015 are sure to act as air pockets for stocks this year.
But I have uncovered a great way for you to profit from the coming volatility.
Basically, you have three legitimate options to add some stability to your portfolio during the turbulent times ahead: You can increase your cash holdings, buy more gold and/or pile into Treasurys.
Each has their own benefit, with gold being the only real insurance policy to an all-out collapse.
But there is another opportunity to make some solid profits if you understand that those three safe-haven options will be bided up in 2015: You can buy an option on U.S. Treasurys.
In Times of Turbulence, Treasurys Outperform
U.S. Treasurys have always been a safe-haven asset. Even though the yield is minimal compared to what you can find in the stock market, your principal is considered as good as cash if you hold the Treasury until maturity, because it is backed by the U.S. government (but I won’t put much emphasis on that). In Treasurys, you escape the volatility and uncertainty of the stock market.
Truth is, I would never recommend U.S. Treasurys as a holding instrument. It is currently yielding less than 2%, and that’s not looking to change dramatically anytime soon. Plus, I don’t put much faith in our government honoring its debts down the road.
But, other investors and traders love to pile into Treasurys, especially when there is uncertainty in the market — and 2015 is set to hold plenty of uncertainty. Traders are anxious about what the Fed will do, when Russia’s sanctions will go away, the future of oil prices … the list goes on.
And even though Treasurys are thought of as a long-term retirement holding, they are extremely liquid and react in real time to market movements. Take a look at this chart below:
It’s almost an identical replica of an inverse S&P 500 Index, except it moves up along with the S&P 500 in some instances. The key thing to focus on is that in periods of a downturn in the stock market, the Treasury exchange-traded fund (ETF) rallies.
Profit From Uncertainty
As we get into the second quarter of 2015, I believe we will see Treasurys rally from more than just a downturn in the U.S. stock market. We will see worries about the developing crosscurrents cause investors to pour into Treasurys even if stocks are performing well.
But, as I said before, I don’t want you to go out and buy a Treasury, or even the ETF.
Instead, we are going to make a leveraged bet that volatility and turbulence will be present in the first half of the year.
The trade is simple: buy the iShares 20+ Year Treasury Bond ETF (ARCA: TLT) June 2015 $126 call option (TLT150619C00126000) at the market.
If Treasurys perform as I expect they will over the first half of the year, TLT will add about 30% in the coming six months — leaving this option with a 300% to 500% gain.
The option is currently trading around $7. If TLT increases 30% in the next six months, the intrinsic value of the option would be approximately $43.90, or a 527% return.
Not a bad return as we head into the clouds and ride out these turbulent times.
Editor, Pure Income