Over the last couple of months I have been keeping an eye on TLT, the 20+ year bond ETF made to track the face value price of bonds in that particular index. The index, by virtue of trading on the price of the bonds is inverse to the direction of the yield percentage of the bond index.
I had originally been following TLT in an effort to find the best place to enter with the trend to the up side as bond yields to continued to fall. I was intending to place something like a covered call, but by using options, and going out 2 or 3 months. Now, after this parabolic run, I see more risk to the downside than to the upside as far as TLT price is concerned, and I want to play it for a short term pullback.
I wanted to get a lot of profit potential for not a lot of margin put up, so I did a back spread whereby I sold the TLT Feb '20 2015 130 calls, and bought the 135 and 141 calls in equal amounts. Most back spreads are 2 to 1 strikes bought to strikes sold. The reason that I spread the ratio to the upside is to reduce the total risk and thus the margin required for the trade. My breakeven at expiration is 131.86. My max credit on the trade is $1.86 per contract, and the max loss is $3.13.
I plan to close the trade at 50% of max profit or about $.95 per contract. As I type, this price level is 128.45, and will climb a little closer to the 130 level each day due to theta, or depreciation that will occur because of the passage of time. With any luck, I plan to be out of the trade in 7 to 10 days.
I will update here and on Twitter @B50cal1978
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Good Luck to everybody in the coming week!
STT
What platform do you use?
ReplyDeleteMy charts and pictures are from the ThinkOrSwim platform from TD Ameritrade. Almost all of my trade analysis and decisions are made using TOS tools and charts. My trades are placed on Etrade, as most of my trading capital has been with Etrade since 2009. There is a $500 minimum for a TD account granting you access to all of their trading platforms educational resources which are free.
DeleteUpdate: I'm in the red on this one right now, but I still have three whole weeks for the Bond Bubble to roll off. I'm still not convinced that the fair yield for a US note is so low. My plan now, is to hold for an even exit, and to reset a TLT short position for March that is less complex.
ReplyDeleteIt turns out that I was not able to wait for TLT to come back to me. I was assigned the 130 calls which essentially blew up the structure of the spread causing me to manually close the position at the 136.75 level. The position is near a 50% loss all said and done. How would I have done it differently? I could have bought put spreads for a debit, or I could have used an OTM unbalanced butterfly. I also could have avoided trading an American style option product vice European like VIX or SPX. Bonds are so overbought I'm disappointed I could not hold on for more time.
ReplyDelete