Update – $TLT: Bonding Agent

by Dan February 2, 2016 11:14 am • Trade Updates

Back on January 15th we laid out a bullish case for being long U.S. Treasuries and detailed our bullish trade in the TLT, the iShares 20 year Treasury Bond etf to reflect this view (read: Trade Idea – TLT: Bond Villain Hide Out). To refresh here was the trade and rationale:

Trade: TLT ($125) Buy April 120 / 130 Risk Reversal for even money

-Sell to open 1 April 120 put at 1.70

-Buy to open 1 April 130 call for 1.70

Rationale: This trade is most likely is a wash, having a small gain or loss on expiration, but this trade also has the potential to offer an asymmetric payout to the upside in the event of a full blown market panic. On the downside, the put sale down at support makes sense, as I think the likelihood of a crash lower vs spike higher is skewed to the latter.

As I write the TLT is trading $128.35, near 5 month highs, and at levels not seen since the spike that ensued with the August 24th flash crash in stocks.  The trade that we put on for even money when the etf was $125 is now worth about $1.60.  The April 120 put that we sold at $1.70 can be bought back for a $1 profit at 70 cents, and the April 130 call that we bought for $1.70 can be sold at 2.30 for a 60 cent profit, thus the $1.60 profit.

With such a large move in the TLT we are now going to de-risk this trade by buying to close the short put strike, and turn the long call into a vertical call spread by selling a higher strike call, which will leave us with less downside risk on the trade.

  • Action: TLT ($128.35) Buy to Close 1 April 120 put for 70 cents
  • Action: TLT ($128.35) Sell to Open 1 April 135 call at $1
New Position: TLT ($128.35) Long April 130/135 call spread for 70 cents (currently worth 1.30)

Rationale – We are still positioned for a breakout in TLT (which is a great portfolio hedge as well as a trade) and we’ve taken downside risk off the table. We still have risk of .70 from the call spread but that is currently worth nearly a double so we’ll keep a mental stop below and try to be patient on the upside in case TLT breaks out.