Update – $TLT: Bond Hideout

by CC February 11, 2016 10:09 am • Trade Updates

We’ve been for months on RiskReversal that while there’s a lot to avoid in this market, there are a few investment thesis that have a high probability of success in volatile times. Some of these theses can be considered a proxy portfolio hedge, even if they don’t seem that way. One of those trades was a TLT (US 20 year Treasury bond etf) long position we detailed on January 15th, as we felt U.S. Treasuries would once again prove to be the ultimate hide-out as things went a bit haywire elsewhere. Here were the original  thoughts and the initial trade:

If you are finding it increasingly hard to find places to put money to work besides putting on hedges, then you might want to consider long biased view in U.S. Treasuries that seem to have little gap risk to the downside, and the increasingly likely possibility for upside if market volatility across asset classes and geographies continues.

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

A few weeks later (on Feb 2nd) we adjusted the TLT position after a sharp move higher towards our long call strike. We closed our short puts and turned our call into a call spread. Here was the adjustment and new position from February 2nd:

  • 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)

So today we have TLT even higher, but it’s starting to get a little overbought. Check out the parabolic move on this 1 year chart:

From Bloomberg
From Bloomberg

So we’re going to close this trade for a nice profit here and look to re-enter after a pullback:

ACTION – Sold to close the TLT ($133.65) April 130/135 call spread at 2.50 for a 2.50 profit from original position ($1.80 from the roll).

Not a bad little trade, one that was viewed as contrarian at the time.  We will look for another long entry on a move back to $130.