The TLT October 10 $117/117.50 put spreads that I sold last week expire this afternoon and look like it will finish far out-of-the-money. This move against me will give me a realized loss of $79.74 (on top of the realized loss of $51.24 I took last week on my first TLT spread).
Since I won’t be at my desk at the end of the trading day (come find me at the Atlanta Greek Festival if you are in town – email me if you want to find me), I decided to sell my put spread for next week this morning after TLT spiked and started to retreat from an early high of $119.69. While TLT was trading at $119.36, I bought to open three TLT October 17 $120 puts for $1.2167 and sold three TLT October 17 $119 puts for $0.6667. I paid $169.74 for the $1.00 spread, including $4.74 in commission. My limit order was for $0.55 after starting at $0.53 and then raising it twice as TLT sank.
If TLT drops next week, I have a total upside of $130.26, not counting closing costs. A full gain would make this series of trades break-even. If I lose 100% again, my total losses will be up to $261.24 and TLT will be another week closer to reversing.
I decided to use a $1 spread this time instead of the $0.50 spread I used in the previous two attempts with this strategy because it saves me half of my commission costs and sets me up for a better chance to profit. If TLT returned to the price it was trading when I made my trade, I’d have a partial profit. Also, with the $1 spread, I have a wider margin for a partial loss versus a full loss.
Of course, I bought this spread with the expectation that TLT will close next Friday below $119, but a partial gain is better than another full loss. Since TLT resumed its rally after my trade and has made it up to a morning high of $119.76, a partial profit sounds like it could be a good outcome.
For those of you who don’t remember how I started this series of trades, I admitted it wasn’t the smartest idea. It was a theory that I wanted to test with real money, not paper trade it. I started small, but with something that would make me pay attention. I still expect it to work out in the end and plan to continue working my theory, but not necessarily doubling my “bet” each week. I could run out of nerve (and cash) before TLT reverses.
I understand that simply because TLT is at a 52-week high, it doesn’t mean it’s going to move lower soon. This week’s jump higher pushed TLT into territory not seen since early May 2013. I’m still holding onto the idea that the 20-year treasury ETF will follow its historical pattern and mix a down week into its bull run. In every week that I’m wrong, I’d prefer another week like this one that finishes far above my strikes. That might sound odd, but the higher TLT gets, the more likely it’ll roll over again and head lower. The rally could last a lot longer if I only lost by a nickel each week.
More important than TLT’s trend is that the SPX bottomed out this morning only seven points above its 200-day moving average. Support and strength in equities could be all that’s needed to make TLT move lower. So far, that isn’t the case today. SPX moved into positive territory briefly, but TLT stayed elevated by more than 0.60%.
Interestingly, even when TLT made it up to $119.76, a smaller order that I placed for a client for a net premium of $0.47 didn’t hit. I would’ve expected a $0.40 price increase in the underlying would’ve swung the spread by at least $0.08. I’m pretty sure I could’ve made the trade at $0.48, but didn’t want to chase it.
Hey Alex … some thoughts on your TLT trades. If i was bearish, and volatility levels are high i would prefer to sell call credit spreads rather than buy put spreads. More importantly i would prefer to go out 45-60 and sell about 20-25 deltas. I would also buy my longs $5-$10 away … essentially just as protection, but still very cheap … almost mimicking a naked call. If TLT started going against me, i would hedge my deltas by selling puts in the weekly series against my NOV or DEC trade. For example, i could sell the NOV 125/130 call spread for 0.53. You could go closer if you want to be more aggressive. If TLT rises to 123-124, you could sell the 119-120 weekly puts as a hedge/to collect more premium.
Hey Tano, good to hear from you. I answered your question/suggestion in my next post – http://mytradersjournal.com/stock-options/2014/10/16/tlt-weekly-put-spread-series-update-3.
Thanks for the idea.