Last week’s rip roaring rally from seemingly nowhere wasn’t the only price movement of note from the close of Q2. Bonds also underwent a noticeable change in character as prices plummeted and yields rocketed higher.
Of the bevy of bond exchange-traded funds I usually stick with the most liquid of the bunch — the iShares Barclays 20+ Year Treasury (TLT) and the ProShares UltraShort 20+ Year Treasury (TBT). Last week the TLT declined 3.5%. While a fall of this magnitude may not seem like much by stock standards it’s actually a decent sized move in bond land. Since the TBT is a leveraged inverse ETF it has simultaneously staged a notable advance bringing it back above its 50-day moving average. If TBT is able to hold above this key level and continue the reversal into an intermediate uptrend bullish plays start too look more attractive. Selling puts is currently my strategy of choice on the TBT for the following reasons:
1. Given the cheaper price tag of this ETF the margin requirement for short puts is quite low.
2. TBT offers strike prices in $1 increments offering traders numerous strike prices to choose from.
3. Options on TBT are super liquid with most out-of-the-money puts boasting bid/ask spreads a few pennies wide.
[Source: MachTrader]
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Yep, I agree that TBT options are a good position right now. Unfortunately I got into these a little too early with my deep OTM calls but they are for next year and were very cheap protection.
I often use the TBT as hedge to my overall portfolio, either long or shot. Tyler, do you use this as well for a hedge?
Thus far I’ve only been playing TBT to the longside. Once it establishes a short to intermediate term uptrend I look to sell shorter term OTM puts. I haven’t really used it as a hedge against my broader portfolio. It’s just one of numerous positions in my account.
I would note that over time TBT has a positive correlation with the SPX so it’s not as if it moves opposite the broader market by nature. The key to selecting a good hedge is to focus on an underlying that has a strong degree of correlation to the other positions in your portfolio. Because of this I tend to use the SPY as it has a better correlation than TBT to most of my positions.
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