Option Trades on UUP and TLT

The last time I traded UUP I lost almost $279. That was in August 2011 and haven’t thought of the¬†PowerShares DB US Dollar Bullish ETF since then enough to make another trade, until yesterday. I’ve been watching the US dollar lose ground and finally decided I should try to make a profit on it, but without too much risk. I’m happy to trade on nearly any stock or ETF that I think I can make a profit on, but this one means more to me right now. I have a vacation planned for this coming summer to Greece with my dad and son for nearly two weeks and want to hedge the dollar some. My original plan was to buy 10 UUP puts, but this morning the dollar fell another 0.6% and I thought I might have missed the first easy swing. I changed my order to buy only five puts and raised my limit order $0.03. While UUP was trading at $23.26 (on its way back to break-even for the day), I bought to open five UUP June $23 puts for $0.28 and paid $141.86 including $1.86 in commission.

I estimated my original plan to buy 10 puts at $0.25 would’ve cost roughly $255 with commission and will probably add five more puts if UUP makes it back to $23.50 and maybe another five puts if UUP gets close to $24.00. I don’t mind the daily fluctuations and will save a lot more than $255 this summer if the dollar stabilizes. My outlook is that the dollar will weaken further now that the Treasury Secretary has admitted we’re pushing for a weaker dollar to boost US exporting. Currency fluctuations are rarely straight lines and there’s no reason to think these next few months will be any different. That’s one reason I went out five months with this trade. I also wanted to delay the effect of time decay on my long puts, give my trade more time to work out, and run the trade as close to my vacation as possible.

Since UUP is at the bottom of its descending trading channel, I won’t be surprised to see it climb some, which is another reason I cut my initial limit order in half. Moving back to $23.50 would fill the gap in from where it dropped from two days ago. A run back towards $24 would put UUP near the top of its trading channel where it would be ripe for another decline. To see the logic of my price target, you have to look at a five-year chart. In 2013, UUP topped out and fell until May 2014 when it hit $21.14 and started climbing again. I won’t hang on until $21.14, but would like to push my trade until $22.00 if possible. I don’t think I’ll hold on that long really. If I can exit for $0.80, which might be when UUP is around $22.30-22.40, I’ll take a triple and move on. I’m going to let this order sit for a few days and then I might go ahead and enter new limit orders. One of those orders will be for five more June $23 puts and the other might be to sell June $22 puts, creating a vertical spread on the June expiration.

The last time I traded on TLT was in August 2017 when I finished with a $220 profit. I’ve done very well with TLT and I’ve lost my shirt with it too. My big loss came from when I didn’t hedge, just before the Brexit vote and TLT spiked beyond what my margin limits would allow. I was right about what TLT would do, but was way too early and my lack of a hedge killed my plan. Today, I made a small trade and hedged it too. While TLT was trading at $123.82, I sold two TLT $125/128 vertical call spreads for $0.80 each and received $157.56 after paying $2.44 in commission.

The first few interest rate increases from the Fed did little to affect the price of TLT due to macro-economic factors, but if the Fed can raise rates three or four times this year as expected, the price of TLT will have a hard time fighting the pressure. For now, TLT is in a downward trend and I think it’ll be below $120 within a few months. I’d love to see a massive spike in TLT before my spread expires so that I could take the assignment on my short calls and take a realized gain on the long calls. If I can time it correctly, I’d be able to ride TLT as a short position as it comes back down into the low $120s again. I didn’t wait for the next spike in price before I made this trade since I didn’t want to miss even a little potential gain. I only sold two option combinations to keep my risk level low in case I’m wrong on my timing again. The bigger risk will surface if I take an assignment and re-write new a new call spread at higher strikes. My price target for TLT is $117.50, but could see it rise to $126, or even $128 if something bad happens, before it completely rolls over.

I looked at the charts of TLT and UUP together and don’t see a big correlation between price movements, so I think I have a good chance of one of these working for me and could profit (or lose) on both. I wasn’t thinking of these as connected trades, but know rising interest rates can strengthen the dollar if all else was equal. My belief is that rates can go up (and TLT go down since prices and rates move inversely) while the dollar weakens. This trajectory won’t last all year maybe, but I think it can work through the summer.

I didn’t both writing up projected returns as a percentage for these trades since UUP is so leveraged it would be misleading. The same can be said for TLT, but it has the different twist of being a possible short position with no limit on losses if I sold my long leg of the spread. Only a margin call would force me out if I was trying to weather an unhedged spike, but I don’t plan to take that risk again in 2018.



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