Update – $TLT: Closing Sept Call Spread

by Dan June 16, 2016 1:14 pm • Trade Updates

A little less than a month ago when the TLT. the iShares 20 year U.S. Treasury bond etf was trading $130, I expressed a bullish view on bonds, bearish view on yields in the etf in an attempt to fade what I felt was a curious increase in expectations of summer rate hikes (Must Yield to Fedestrians).  Here was my rationale at the time for a bullish trade in the TLT:

no matter what you think the probability of a June or July 25 basis point hike of the Fed Funds rate, the trend is still obvious. I am hard pressed to think that at this stage of the bull market in stocks, given the back drop of weak economic growth globally, that we are likely too see a material change in the yield trend as our economy (and the global economy) has become dependent on low rates and easy access to credit for the subpar growth that does exist


Which brings me back to TLT. A sharp move lower is certainly possible, but as stated above, if we get a summer rate hike I suspect it is not followed by a string of hikes. On the flip-side I see a far greater chance of a sharp move higher in the event that rate increases don’t materialize, coupled with the sort of downward volatility spikes we have seen in risk assets on two occasions in the last year, a sort of flight to safety trade could emerge in US Treasuries

Here was the trade idea from May 20th:

TLT ($130) Buy the Sept 126 / 133 Risk Reversal for even money

-Sell to open 1 Sept 126 put at $2.50

-Buy to open 1 Sept 133 call for $2.50

Two weeks later, on June 3rd, after a $3 rally in the TLT, we decided to de-risk the position by covering the naked short put, and locking in some of the gain of the long call by selling a higher strike put of the same expiration, and thus defining our risk from here on out (here)


  • Bought to Close the TLT ($133) Sept 126 puts for 1.30
  • Sold to Open the TLT ($133) Sept 138 calls at 1.60

New Position: 

Long the TLT ($133) Sept 133/138 call spread for a .30 credit (currently worth 1.70)

This morning the TLT traded as high as $137.50, making a new 52 week high, achieving the breakout I was playing for, but with the trade management from a couple weeks ago, my gains are now capped at the width of the call spread, very near this mornings highs,. With 3 months left to expiration, the risk reward no longer looks attractive to hold for the full width of the call spread. I am now going to take the profit and look for another long entry, back in the low $130s in the weeks to come.

Action: Sell to Close TLT ($136.40) Sept 133/138 call spread at $2.35, for a $2.65 gain when you include the credit from the roll.

$133 looks like a good long entry on a pull back.

TLT 1yr chart from Bloomberg
TLT 1yr chart from Bloomberg