On September 1st I shorted bonds via TLT. And then, they ripped. I was early. Way early. And yet, I still made money. Here’s how.

There are two ways to build your trades.

Path 1: Assume you’re a genius with perfect timing and never wrong.

Path 2: Assume you’re an idiot with terrible timing and never right.

Two Roads, Diverging, In the Woods

No doubt, the truth lies between both paths. We are, at times, trading Einsteins, nailing turning points with precision. And then, we get it wrong, terribly so. Like blind men fumbling in the dark.

Traders trodding both paths can profit. But I prefer the second. It offers the occasional surprise where my entry point turns out perfect. In contrast, only nasty surprises lie in wait for path number one. Of course, advocates of the first one will argue that they have contingency plans when wrong – stops losses and such.

I get it. And agree.

But they never use adverse movement to their advantage. It’s a curse, a sorrow-giver, forever and always.

With the second road, we take lemons and make lemonade.

Bonds, Misbehaving

It was Wednesday, August 7th. Bonds were on pace for their sixth monster up day in a row. Overbought? Yes! Overdue for a pause or pullback? Undoubtedly! They even carved out an ominous dark cloud cover candlestick on capitulation-esque volume to signal a short-term top was likely.

Couple the technical signs with high implied volatility and the time was ripe for a bear call spread play.

Or so I thought.

I rapidly deployed a Sep 147/149 bear call for 38 cents credit. The number of contracts was 1/3rd my full size.

Then after dropping the next morning, bonds flipped me the bird and flew to the moon. Fast forward to Aug 14th, TLT has advanced from $142 to $145. Time for tier two. I entered another 1/3rd size of Sep 147/149 bear calls. This time at a 60 cent credit.

TLT pushed higher one more session, then finally pulled back. Unfortunately, it was a weak drop, lacking conviction. Given how far TLT had moved against me I decided to tack on a bull put as a partial hedge on Aug 19th.

Here’s the trade thus far:

8/7: Tier One: Sell Sep 147/149 bear call @ 38 cents

8/14: Tier Two: Sell Sep 147/149 bear call @ 60 cents

8/19 Hedge One: Sell Sep 138/135 bull put @ 30 cents

After the 19th, TLT chopped around but never fell enough to capture a profit on my second tier. Instead, it pushed higher, and on 8/27 I took profits on the hedge, closing it at 10 cents to capture a 20 cent profit.

One day later, on Aug 28th, TLT gapped higher and started to fade. I added my third and final tier, selling another 1/3rd size of Sep 147/149 bear calls for 95 cents. At this point, I’m out of bullets and in full size. If TLT continues to rise, then I bail or roll the position out to the next month to extend duration, and buy another month to play.

Fortunately, the long-awaited pullback arrived right after my third tier was entered. I incrementally took profits on each tier as my targets were reached.

Redemption has arrived. Here’s the final tally:

8/7: Tier One: Sell Sep 147/149 bear call @ 38 cents

8/14: Tier Two: Sell Sep 147/149 bear call @ 60 cents

8/19 Hedge One: Sell Sep 138/135 bull put @ 30 cents

8/27 Hedge One: Exit @ 10 cents. Capture 20 cent profit

8/28 Tier Three: Sell Sep 147/149 bear call @ 95 cents

9/5 Tier Three: Exit @ 60 cents. Capture 35 cent profit

9/9 Tier Two: Exit @ 30 cents. Capture 30 cent profit

9/10 Tier One: Exit @ 10 cents. Capture 28 cents profit

Whew!

In case you missed it, the method to my madness is as follows:

Step One: Scale-in and out with three tiers

Step Two: Hedge if the opportunity presents itself

Step Three: Pray

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