When it comes to tracking bond prices, traders have a handful of ETFs to choose from.
As far as popularity goes, the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT) reigns supreme as the most actively traded security among the bunch, with millions of shares trading hands on a daily basis. Not surprisingly, the heightened liquidity spills into the options market, resulting in narrow bid-ask spreads and a score of option contracts boasting open interest in the thousands.
Click to Enlarge And yet despite all these positive qualities, adrenaline junkies bemoan the lack of volatility present in TLT. In the past three months, 20-day historical volatility has hovered in a range between 10% and 17%. What’s more, implied volatility has never ventured higher than a 3-point premium above historical volatility over the same time frame, making it tough to find overpriced options worth selling.
Those looking for an alternate bond ETF with a bit more pep in its step should take a look at the ProShares UltraShort Lehman 20+ Year Treasury (NYSE:TBT). It is both an inverse ETF designed to move in the opposite direction of TLT, and a leveraged ETF designed to move 2x the amount of TLT on a daily basis.
Click to Enlarge For example, TLT finished Friday up 0.84% on the day while TBT finished down 1.78%. Though TBT does a fairly decent job of moving 2x TLT in the opposite direction on a daily basis, it does not do so in the long run. Because of the inherent leverage and compounding, it drifts lower over time, making it a poor buy-and-hold vehicle.
At 30%, TBT’s 20-day historical volatility runs quite a bit hotter than TLT, which leads to options with higher premium. In other words, option-selling strategies appear more alluring on TBT.
TBT had fallen off of many traders’ radars in recent months due to it dropping below the $20 threshold. As mentioned in my recent missive on the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE:VXX), it becomes increasingly difficult to structure appealing option trades on stocks that have fallen into the teens or single digits. Fortunately, ProShares has joined the reverse-split party by announcing a 1:4 reverse split on nine of its ETFs, including the aforementioned TBT.
Last Friday, the inverse bond ETF opened at a post-split price of $64.75. Now that TBT’s share price has returned to a respectable level, a number of option strategies are back on the table.
Here’s my top bull and bear option picks for TBT:
If you think the downward pressure on bond prices will continue, consider selling November 60 puts on TBT for $1 or better. Consider it a bet that TBT will remain above $60 through November expiration.
If you think the mounting list of worries for stocks will result in a mad dash of money back into the safety of bonds, consider selling a November 68-70 bear call spread on TBT for 35 cents or better.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.