Thursday, June 4, 2015

TLT Analysis

Update 6/30/2015: I exited the bear call spread position as the price of Treasury bonds, and therefore TLT, began to creep upward.

Shares declined by 0.6% over 26 days, or a -9% annual rate. The options position produced a 69.7% yield on debit, for a +978% annual rate.

Update 6/19/2015: I exited the iron condor position on the final trading day before expiration. The price was 9 cents out of the money but the position still turned a profit.

Shares rose by 1.9% over 10 days, or a +69% annual rate. The iron condor produced a +14.6% yield on debit, for a +534% annual rate.

Update 6/9/2015: I've added to my TLT position in order to put funds from a small tax-deferred account to use. The new position is structured as direction neutral, unlike the original bearish position. The purpose is to obtain a higher premium at the price of adding downside risk.

Iron condor, short the $118.50 calls and long the $119.5- calls,
short the $114.50 put and long the $113.50 puts
sold for a credit and expiring June 20
Probability of expiring out-of-the-money


The risk/reward ratio is 1.4:1. The premium from the sale is $0.41 with shares trading at $116.50.

The iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT), which tracks long-term U.S. federal government debt, fell below its 20-day price channel on Wednesday sending a bear signal. The price pulled back up within the channel the next day, suggesting that TLT is a candidate for a direction-neutral trade.

I shall use the JUL series of options, which trades for the last time 43 days hence, on July 17.

In the analysis that follows, I'll be applying changes to my trading methods discussed in the essay, "Finding the best trades".

[U.S. Treasury security in Wikipedia]


The success rate of bear signals given by TLT over the past year is even odds. Half of the four signals has been profitable, with a 2.8% yield over 36 days, on average. The unsuccessful signals on average produced a 24% loss over 14 days.

However, looking only at period since the Jan. 29 peak, the picture changes. Both bear signals were successful, on average yielding 2.8% over 36 days.


Click on chart to enlarge.
TLT at 11:05 a.m. New York time, one year daily bars
I had to push back to September 2014 to get a reasonable support level. The chart shows TLT in a downtrend, and the historical odds of a successful bear signal back that up. The chart suggests a directional bear trade would be the best strategy, although the price on Thursday failed to follow through on the bear signal. So it is ambiguous.

Implied volatility stands at 17.1%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. TLT’s volatility stands in the 75th percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

Given the downtrend, I've chosen to place a directional trade with the short strike placed a goodly distance away from the current market price.

I also tried an iron condor with the same upside risk. The premium was only 4 cents more. So I gain a lot from the directional trade at very little cost

Bear call spread short the $122 calls and long the $125 calls,
sold for a credit and expiring July 18
Probability of expiring out-of-the-money


The risk/reward ratio stands at 4.5:1. The premium is $0.56, which is 28% of the width of the position’s wing.The stock at the time of purchase was priced at $118.49.

Decision for My Account

I've opened a position in TLT as described above. If implied volatility rises to 80% I shall consider adding to the position. The 25% of maximum profit point is $0.42. Given the high risk/reward ratio, my sizing rules kept the position fairly small, and a 25% profit would hardly be worthwhile, so I intend to rely more on the chart trend than a profit target to govern my exit.

-- Tim Bovee, Portland, Oregon, June 6, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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