I spent some money today, $3,752.39 to be exact. As I did at the end of May, I closed out my ratio spread on TLT that included short in the money calls. TLT dropped hard at the open, down nearly a $1 and I jumped on the opportunity to get out of my short option position while I could. I didn’t want to have the short options in place as TLT went ex-dividend tomorrow since I only had $0.12-0.15 in time value remaining. The shares would’ve been assigned and I would’ve had a margin call.
While TLT was trading at $129.07, I bought to close 10 TLT June $125 calls for $4.10 each and paid $4,104.11 including $4.11 in commission. I received $9,968.26 for these calls originally, so I ended with a realized gain of $5,864.15 on this leg of my combination. The bad news is that I had two legs in this trade and the other one cost me dearly.
Nearly an hour and 20 minutes later, after watching TLT climb steadily all morning, I sold my long calls for June too. While TLT was trading at $129.85, I sold 20 TLT June $134 calls for $0.18 each and received $351.72 after paying $8.28 in commission. I paid $9,739.07 for this hedge in February, which gave me a realized loss of $9,387.35 on this leg of my combination.
The combination cost me a total of $3,523.20, which isn’t as bad as I might have expected, but a lot worse than I was planning for when I made the trade in February. Now that I’ve run through this process, I’ll know better next time. While the trade could’ve worked if TLT had followed its usual path of spiking and then dropping within two months or less, instead it remained elevated and I lost. I would’ve been better off if I had closed the original naked calls for a loss and sold new out of the money naked calls.
I’m down to having 1,300 shares short and 8 covered puts on TLT. I plan to write new options on the ETF soon and will decide within the next few days (if I have time) which side I want to sell next. I might sell new naked calls out of the money or could sell new covered puts out of the money. Either way, I don’t have to decide right away. If TLT pushes higher, I’ll sell new calls. If it drops, I’ll sell new puts. I can’t wait too long to make a decision because it’ll eat into the time value I would have received.