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Go Both Ways After the TBT Reverse Split

Bearish and bullish options plays for the inverse leveraged fund


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.

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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.

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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.

Article printed from InvestorPlace Media, http://investorplace.com/2012/10/go-both-ways-after-the-tbt-reverse-split/.

©2017 InvestorPlace Media, LLC