Trade Idea (TLT): Shorting 20+ Year Paper Via Ratio Backspread
A setup to take advantage of a potential rising interest rate environment without knowing exactly when rate hikes will occur.
Typically, this is set up by buying two of the back month 75 deltas and selling the front month 50 delta, such that you create a spread or diagonal with a net delta metric of around 100 (+100 if a bullish assumption spread or digaonal; -100 if bearish).
Here, I would buy the June 75 delta 163's, and sell the December at-the-money 144, resulting in a net delta of -101.65. With a buy-in of 40.81 at the mid ($4081), it isn't particularly cheap, but certainly cheaper than shorting 100 delta of TLT shares outright and with multiple opportunities to reduce cost basis by rolling out the short put aspect if a move isn't immediately forthcoming.
From a trade management standpoint I either (a) look to roll out the short put aspect to reduce cost basis further if the long put vertical aspect (i.e., one of the long put contracts + the short put aspect) of the setup doesn't converge on max; (b) look to take profit on the long put vertical aspect as soon as it converges on max and allow the remaining long put contract to either "ride" or cap it off by selling a short put against, creating a "new" long put diagonal.
Variations:
A long-dated, static long put vertical with lower net delta, specifically targeting 136:
TLT June 17th 136/155 Long Put Vertical (Buying the 155, Selling the 136)
Buying Power Effect: 10.78 ($1078)
Break Even: 144.22 vs. 144.13 (Friday's Close)
Delta: -33.62
Max Profit: 8.22 ($822)
Typically, this is set up by buying two of the back month 75 deltas and selling the front month 50 delta, such that you create a spread or diagonal with a net delta metric of around 100 (+100 if a bullish assumption spread or digaonal; -100 if bearish).
Here, I would buy the June 75 delta 163's, and sell the December at-the-money 144, resulting in a net delta of -101.65. With a buy-in of 40.81 at the mid ($4081), it isn't particularly cheap, but certainly cheaper than shorting 100 delta of TLT shares outright and with multiple opportunities to reduce cost basis by rolling out the short put aspect if a move isn't immediately forthcoming.
From a trade management standpoint I either (a) look to roll out the short put aspect to reduce cost basis further if the long put vertical aspect (i.e., one of the long put contracts + the short put aspect) of the setup doesn't converge on max; (b) look to take profit on the long put vertical aspect as soon as it converges on max and allow the remaining long put contract to either "ride" or cap it off by selling a short put against, creating a "new" long put diagonal.
Variations:
A long-dated, static long put vertical with lower net delta, specifically targeting 136:
TLT June 17th 136/155 Long Put Vertical (Buying the 155, Selling the 136)
Buying Power Effect: 10.78 ($1078)
Break Even: 144.22 vs. 144.13 (Friday's Close)
Delta: -33.62
Max Profit: 8.22 ($822)
Comment:
I haven't played the inverse -- TBT in quite some time, so I could see tapping into that for a long-rates play if you've got less money to play with.