TLT Analysis

Update 7/18/2016: I exited TLT below my benchmark 50% of maximum profit. I wanted to free up the funds to pursue opportunities during earnings season, and the value of the position was bouncing between profitable and not. Besides, I got out with quite a good profit, so what's not to like?

Shares rose by 2.2% over 31 days, or a +26% annual rate. The options position produced a 25.0% yield on debit for a +294% annual rate.

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The iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT)  has implied volatility high enough to meet my standards. The expense rate is 0.15%. The annual dividend yield is 2.35% at today's rates, paid monthly.

[U.S. Treasury security in Wikipedia]

TLT

I shall use the AUG series of options, which trades for the last time 63 days hence, on Aug. 19.

Ranges

Implied volatility stands at 17%, which is 0.9 times the VIX, a measure of volatility of the S&P 500 index. TLT’s volatility stands in the 69th percentile of its most recent range. The price used for analysis was $135.72.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	145.18	154.63	N/A
Lower	126.26	116.81	N/A
Gain/loss	±$9.46	±$18.91

Implied volatility 1 and 2 standard deviations; central tendency earns move

Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One) by Harry R. Markowitzh et al.

Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume Two) by Harry R. Markowitzh et al.

The Trade

Over the long run TLT's share price has been working higher since 2004 in a series of wide zig-zags. The most recent leg up began on May 31 and peaked on June 16.

Iron condor, short the $143 calls and long the $144 calls,
short the $128 puts and long the $127 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	143	80.8%
Lower	128	80.0%

The premium is $0.30, which is 30% of the width of the position’s wings. The stock at the time of entry was $135.74

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $7.50 move either way.

Decision for My Account

I've entered a position on TLT as described above.

-- Tim Bovee, Portland, Oregon, June 17, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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Disclaimer

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.

License



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Based on a work at www.timbovee.com.