I’ve been watching TLT climb like a machine since 2016 started. I expected every spike to be the last one and every dip to be the turning point to lasting lower prices. I should’ve bought a far out of the money hedge weeks ago, but figured I could weather it. Then I got a margin call warning yesterday afternoon. It wasn’t an actual margin call, but just a heads-up that I was running out of room in my account to hold my losing positions, both short and long.
I decided I’d wait until this morning to address it hoping TLT would drop some and my stock ETFs would start to recover. That didn’t pan out, so I had to make an adjustment. While TLT was trading at $131.62, I bought 20 TLT May $133 calls for $3.569 each and sold 10 TLT May $126 calls for $7.216 each. The short calls paid for the long calls and I received $54.52 net in premiums after paying $23.48 in commission.
By buying two calls for every one call I sold, I hedged half of my TLT position, but left a wide gap to have temporary losses. I don’t think TLT will stay above $130 for long, but I’d be very foolish to let it continue to run against me when I had an easy solution that actually brought in net premiums.
I looked at the five-year, weekly chart for TLT and saw the July 2012 spike that took TLT above $130 for the first time (which was also the first time I shorted the shares). TLT traded above $130 for five weeks that summer (not five in a row) and then through a bouncy road, fell below $102 within 18 months. TLT hit a new record high of $138.50 in January 2015 and stayed above $130 for 12 weeks, with a few weeks in between to break it up. Then it fell to $115 before ramping up again.
I could see TLT reaching back towards the upper $130s, but don’t think it will. I’ll probably buy another hedge on any dip to protect myself in case I’m wrong again. These May calls I’m using as a hedge don’t expire for nearly 15 weeks. TLT should be in retreat by then (unless it sets a new record for time above $130) and I’ll lose on the long $33 strike calls while I make money on the rest of my positions that appear to be on the path to be assigned this month and next.
I have no doubt TLT will fall below $120 again and will probably fall below $110 within a few years, if not much sooner. I don’t plan to ride it down to multi-year lows while short, but I do plan to work this position to a nice profit again. I’ll cut my risk along the way. You never know, maybe by entering this hedge, it’ll trigger TLT to reverse tomorrow after Fed Chair Yellen speaks.