A couple of days ago, I mentioned my plan to stay patient and wait for my new trade on TLT. Yesterday, TLT started to improve for me and today I pulled the trigger. While TLT was trading at $129.88, I bought to close seven TLT April $128 puts and sold to open seven TLT May $128 puts for net $1.23 per combination. I received $851.31 after paying $9.69 in commission. My trades hit in six separate trades over four seconds with the April puts ranging from $0.05 to $0.07 and the May puts ranging from $1.28 to $1.30. My average price is $1.283484, including commission, for my new May puts, or about $898.44 worth of premium. This total means it cost me $47.13 to buy back my April puts that will probably expire worthless tomorrow. It also means I made a realized gain of $824.90 on my April puts.
TLT fell $0.70 since I sold my April puts, so I made another $490 (on paper) from my 700 shares short. However, I paid $240.53 in interest for the short position too. The interest payment was worth the trade since I made a net $1,074.37 in a little less than a month (including the $490 of unrealized gain) and have no cash allocated to protect the position. So, these earnings are just gravy on whatever else I can make with my equity options trading. I almost forgot – I’ll pocket another $312.99 from my April naked calls that look ready to expire worthless tomorrow.
I would’ve made more by selling the $129 strike for April, but (like my May puts) I wanted to leave room for further downside movement in TLT. The 20-year treasury ETF could stay elevated through the summer, but if I can keep netting nearly $600 per month in premiums minus interest, I’ll continue to work the lower strikes and will eventually realize the gains from the price decline. I also would’ve made more by letting the April options expire worthless, but since I saw TLT reversing from its low of $129.41 this morning, I wanted to sell new covered puts before tomorrow. It’s a shame I didn’t catch the bottom, but I can’t be lucky with every trade. TLT is over $130.50 as I write this, so I’m glad I got the trade in when I did.
I’m planning to sell new TLT naked calls, but want to see TLT a little higher first. I might sell naked calls with a strike as low as $132, but I’ll only sell three if I do that. If I use a higher strike, I might sell as many as six naked calls. That’s something I can debate with myself tomorrow when it’s clear my TLT April naked calls will expire worthless.
Before anyone emails or comments about the risk associated with leaving my short shares uncovered, I’m aware of the risks and believe the premiums I’m taking in mitigate the long-term risk enough for my risk tolerance. It’s clearly not for everyone, but it’s working for me – so far.