After peaking at the end of May, TLT had been on a steady slide until last week when it finally found some footing and reversed course. I watched during the nearly two-week slide and wished I had sold more naked calls in May, but I kept holding back as I expected at least a little rebound to break it up mid-way through its descent. Yesterday, I noticed TLT seemed stuck between its 10 and 20-day moving averages and it wasn’t adding onto the move it made the day before. I checked the high trades for various TLT July calls, but didn’t want to risk selling naked calls at such low levels right now. That risk-averse feeling pulled me back to the idea that I should hedge my trade by selling a bear call spread.
I wanted to make at least $500 on my trade and looked through all kinds of combinations. TLT was trading around $118 at the time I entered my order yesterday and I thought it might retest its 20-day moving average again within the next few days. It took less than one day for my order to hit. While TLT was trading at $118.98, I sold 10 TLT July $121 calls and bought 10 TLT July $124 calls for a net premium of $0.65. I received $638.60 after paying $11.40 in commission. The 10 combinations traded in three different lots with some of the $121 calls selling for $1.15 and some for $1.16 each. The $124 calls cost me $0.50 and $0.51 each.
If TLT has another bullish run, I could lose $2,361.40 if I closed the position at expiration, but most of you know that’s now my plan. I don’t expect TLT to be above $121 by the third Friday in July, but if it is, I’ll take the assignment on my short calls and if I have any intrinsic value in my long calls, I’ll sell them to bring in more money. Ideally, if TLT doesn’t run flat or lower as I expect it to, I’d like to see it run back into the $130s by July expiration so I can short the shares at a much higher level.
If I’m assigned shares at any price, I’ll add new covered puts like those that I sold last time and will probably add in 10 more naked calls too. Bond prices will drop again and I plan to work this trade as long as I can. I might regret selling the short calls at the $121 strike, but if I can continue to be patient with the trade again, I have no doubt it’ll work out eventually.