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With a looming “debt bomb” around the world, I’m always looking for a chance to short interest-rate plays. I’ve certainly taken every opening to do so in recent months, and this latest rally in iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) was a fresh opportunity to put on a contrary position.
The play I’m making here, specifically, is a call credit spread:
Using a spread order, sell to open the TLT Aug. 17th $124 call and buy to open the TLT Aug. 17th $134 call for a net credit of about $0.45.
Note: There are several August expirations available for TLT options. Be sure you are opening the monthly options that expire on Friday, Aug. 17, 2018.
For those who aren’t as familiar, a call credit spread is a bearish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
In this bearish trade, you want the underlying share price to stay below the lower strike price of the spread. Here, we want TLT to stay below $124 through the Aug. 17 expiration. In this scenario, our TLT calls would expire worthless, allowing us to walk away with the full premium we collect today.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.