Bought TBT Put Spread

Bonds are getting interesting these days.  The fears out of Europe are driving yields lower on this side of the ocean, which finance 101 tells us bond prices are rising.  TLT is close to its all time closing high.  I expect it will top out soon and come back to the low 120s quickly and eventually back to the $112-118 area.  I believe that enough to keep my TLT July 127/129 short call spread in place for now even though I’m taking a beating on paper every day.

I started playing with TBT (leveraged inverse 20 year treasury ETF) spreads to see what I could come up with to profit from this extreme volatility.  My initial instinct was to buy a call spread to profit from the collapse of bond prices (and matching TBT rally) that should hit within the next month or so.  The issue with that is that if I’m wrong I’d lose twice, once on my TLT calls and then again on the TBT calls.  I ended up doing the reverse, buying puts.  While TBT was trading at $16.50 (and TLT was at $123.75) I bought five TBT June $16 puts for $0.45 and sold five TBT June $14 puts for $0.08.  I paid $191.25 for the $0.37 spread including commissions and have a little more than $800 upside potential including closing commissions.

If the trading gods give me a hand, I’ll be able to take a profit on this trade during June (if not before) and then finish with a profit on my TLT calls in July too.  I don’t think bond prices are going to stay this elevated through July expiration, let alone above $127.  Previous moves in TLT that came near this price area were part of a spike that was short lived.  This could be a black swan moment and if so, I’ll profit on my TBT puts and if I stay wrong long enough I’ll lose on my TLT calls.  Once the turn lower in bonds starts, I plan to buy TBT calls, maybe not with a spread, but just an outright buy.  The only issue with TBT over the longer term is that it is flawed and loses value over extended periods, I assume because of its leveraged set-up.  For that reason I don’t want to go all of the way out to September with my bullish TBT trades.  July options will be available in a few days, so I’ll be able to consider new strikes then.

I might be kicking myself in a week with regret that I didn’t give myself more room to profit in a bond price drop, but I figure my equity positions will be back in rally mode whenever that happens, so I don’t need to add more risk to that side of the trade.  If tomorrow doesn’t give stocks a worthwhile move higher, I’ll probably buy some SH calls or sell SH puts.  That will probably be a signal for all of you to get bullish since I haven’t done well with timing these SH trades in the past.  I also have four puts expiring tomorrow.  All are deep in the money right now, so I have to decide if I want to take the assignments (assuming it doesn’t happen to me before I get to make the decision) or close them for a loss.

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  1. Comment by Ronan

    Just a little word of warning when using Interactive’ Brokers Trader Workstation – be careful of Option Spreads.

    When you do a spread via the ‘Combo’ tool, it allows you to specify a multiple when setting up the spread. Then, when you go to actually place the order, it asks for a Limit (as you would expect). It also asks for a multiple – but this is a multiple of the multiple :O

    Basically, you can set up a “Combo Tool” order that involves two TLT spreads. Then, you go to the order screen and it asks for how many of these “two spread” orders you want to place.

    What I didn’t expect, is that the Limit specified on the order screen isn’t ‘per spread’. It’s for the multiple spreads. I’ve just been caught out with this.

    For this reason, you’re better specifying a single spread in the ‘Combo’ tool and select your multiple just before placing the order.

    Luckily, it was TLT that I done this with (as I’m of a similar opinion to you) and the bid/askspreads aren’t very wide. Therefore, I got $0.13 per spread after putting in a limit of $0.20 (the system appears to have taken this as a Limit order of $0.20 for the four spreads as opposed to a Limit order for each spread).

    Hope this makes sense. Email me if it doesn’t. You could be hit VERY badly if doing spreads on individual stocks with wide bid/ask spreads.

  2. Comment by Alex Fotopoulos

    Thanks for the warning Ronan. I haven’t seen that yet when going through IB’s spread tool and have used the “Multiple” tab and the “Strategy” tab. Now that I looked at it again, I see a check mark at the bottom if you want to get a price for the Combo. It’s not checked for me. Was it for you?

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