Selling vertical call spreads on TLT is one of my favorite trades. I did it three times last year and only had one assignment. That one assignment ended up turning into a $2,400+ profit. The spreads that expired worthless were just good profits on their own that required no adjustments. I didn’t jump back into another TLT spread after my December contracts expired, but should have. TLT dropped hard for a few months and only recently made it back into the $120s. I didn’t want to catch the 20-year Treasury ETF while it was in the middle of a straight run higher, but have been watching and waiting for my next entry. It dipped faster than I could get a decent order to hit a couple of weeks ago. Now that it has come back to retest those recent highs, I didn’t want to miss the opportunity to profit from the volatility again.
The call premiums were falling yesterday and I figured the ETF would move higher at least once more and priced my order to trigger on the next small push higher. While TLT was trading at $123.16, I sold 10 June $127 calls for $0.686 each and bought 10 June $129 calls for $0.406 each. I received $272.23 after paying only $7.77 in commission. That was about half of what I paid in commission for similar trades in 2012. When I entered the $0.28 limit order yesterday, it looked like I could have sold the spread for $0.24-0.25. I should’ve aimed higher with my limit order, but didn’t want to miss out on a shallow bounce. The high spread price I saw this morning was around $0.32-0.33, so I missed out on $40-50. That doesn’t bother me much since I know I could’ve done worse yesterday if I didn’t have the patience that I did.
My spread orders I sold last year ranged from $0.16 and $0.23 to $0.31. Interestingly, the highest spread amount I got was from higher strikes ($129/131). I’ll work the same plan with these orders as I did previously. I’ll happily take an assignment to go short TLT at $127 based on the belief that the yield is due to rise eventually as prices plummet. I thought about making this an iron condor and adding in a put spread, but my belief that TLT will drop hard at some point kept me from adding that risk.
TLT Vertical Call Spread Breakdown:
- Potential profit: $272.23
- Upside risk: $1,727.77
- Potential call spread return: 15.76%, 8.3% per month
- Upside cushion: 3.23%
- Short call delta: 0.23
- Position close goal/limit: Aiming for full profit and will work it like my July 2012 TLT spread where I take the short 1,000 shares assignment if it gets there.
This order pulls me above $500 in premiums for the week. Next week I might start closing some May positions and rolling them out further since these are getting pretty cheap and I think I could do better elsewhere. May doesn’t look like it’s going to pile in the realized gains for me, but June and July are looking better.