I still had 300 shares of TLT that I was short without any options surrounding them after selling new TLT covered puts earlier this week. When TLT spiked again today, I was close to another margin call and was thinking about taking a realized loss on some of the shares. Before I made that trade, I came up with an alternate plan.
While TLT was trading at $143.39, I sold three TLT September $136 covered puts for $1.10 each and received $328.90 after paying $1.10 in commission. One alternative was to sell some of my long shares of DIS, IWM, or MDY. I didn’t want to do that since they have momentum going now – at least today. I could also have bought to close some of my short shares of TLT and taken a big loss. I didn’t want to do that yet either, but realize that time might come soon.
I’m trying to avoid buying back my TLT shares yet because I continue to believe TLT will reverse sooner than later. I’ve been wrong for so long that I’m beginning to doubt myself, but prefer to push it a little longer. By selling covered puts with higher strikes, I’m bringing in more cash from bigger premiums, but am not giving myself as much potential profit on a reversal. I’d rather lose potential profit down the road versus locking in a bigger loss now.
If I had taken the smaller loss months ago, I’d be sitting much better now. That could be one of the reasons I don’t want to exit now. It’s hard to take a big loss and hurts more when the underlying stock or ETF reverses soon after you exit the position. I don’t doubt if TLT will move lower. The only questions are when and how much higher it’ll go before reversing. As long as German bunds have negative yields, US Treasuries will continue to be bought by foreign investors and will continue to push our yields lower.