SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Using TLT Options to Increase Expected Returns of a Buy & Hold Portfolio


TLT is the iShares 20+ Year Treasury Bond ETF that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. Even though US Treasuries typically act as a diversifying asset class to mainstream equities, many investors with long time horizons may not be interested in holding TLT in their portfolio because it would lower expected returns.

While this is true, this ignores the ability to layer on options exposure in a margin account in a well thought out disciplined manner.

 

TLT is a popular ETF for options traders because US Treasuries are a widely followed market resulting in options contracts with high volume and liquidity. Even long term investors could benefit from trading TLT options, and I have a couple ideas of how. First, an investor with an equity ETF portfolio that is passively managed could write TLT puts as an overlay to increase expected returns and add diversification. This would be the more conservative approach. The second way would be to simulate a synthetic long TLT position by purchasing a longer dated ATM call and selling an ATM put. Some people refer to this position as a synthetic, a combo, or a risk reversal.

 

A trade example looking at today’s closing prices would be the following:

  • Buy 1 TLT January 21, 2022 143 call
  • Sell 1 TLT January 21, 2022 143 put

For a credit of $0.70

 

The confirm and send page for ThinkOrSwim shows the following details:

 

image.png

 

This position is very similar to owning 100 shares of TLT, which would currently cost more than $14,000. As a synthetic long position, the options trade is actually done at a small credit and would have positive carry evidenced by the break even stock price of $142.30. If an investor had a portfolio of $100,000 fully invested in a basket of equity ETF’s, similar to our ETF BuyWrite strategy available at no additional cost to Steady PutWrite subscribers, he or shemight also buy 2 or 3 TLT combos and effectively have a portfolio 100% invested in equities and 28-42% US Treasuries.

 

The TLT option combo will have a very similar return when held until maturity as owning TLT directly. There would likely be a small lag relative to TLT with the option combo because borrowing costs roughly equal to the risk free rate are embedded into the price of the contracts. If this were not true, you could go long TLT and short the options combo and earn the TLT yield without any price risk since it would be offset by the option positions.

 

Overall, this trade idea is a way to efficiently create low cost leverage. Since leverage magnifies both risk and return, it should be done carefully and only if you have a good understanding of the potential outcomes. My crystal ball is always cloudy so I can’t say if now is a good time or not to add this type of trade to your portfolio, but TLT was down more than 20% and currently is down about 14% since last August. Since US Treasuries tend to be a less volatile asset class than equities, this level of drawdown doesn’t happen often. Looking at monthly data going back to 1935 I find that this current drawdown would rank among the 5 largest in history. Buying proven asset classes like stocks and US treasury bonds with lots of long term evidence when they are going through large drawdowns usually turns out to be a good investment.

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.

Related articles

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Probability vs. Certainty Trap

    We all would like all our trades to be winners, but we know this is not possible. We know some of the trades will be losers. Many traders think that if a trade has lost money, it was a bad trade. They try to identify what errors they made that lead to losses. Why? "Because I lost money! So surely I have made a mistake somewhere?”

    By Kim,

    • 2 comments
    • 6,295 views
  • How To Choose The Right Platform For Your Stock Trading

    The interest in stock trading has increased due to its higher returns and profit potentials. Like the many traders available, there are numerous approaches and platforms to set your trading environment. Online trading platforms provide adequate resources and tools for their clients' trading success.

    By Kim,

    • 0 comments
    • 1,601 views
  • How To Approach Passive Investing

    Passive investing refers to an investment technique that seeks to increase returns by limiting purchasing and selling. One of the most popular passive investment strategies is index investing, this means that a group of investors buy a representative benchmark, and keep hold of this over a long period.

    By Kim,

    • 0 comments
    • 1,562 views
  • How Anchor Survived the 2020 Crash

    We are often asked how the Anchor strategy performed during the market crash of 2020. The monthly performance can be seen on the performance page, but it shows the End of Month values and doesn't tell the whole picture. This article will shows a detailed analysis of the Anchor portfolio during the crash.

    By Kim,

    • 2 comments
    • 3,206 views
  • Lumpy Dividends and Options

    Dividend payments, like oatmeal, may be smooth or lumpy. Smooth dividends are predictable, usually once per quarter. It is easy for options traders to believe these dividends are guaranteed, because they usually continue uninterrupted quarter after quarter. This also makes it easy to predict total return over a longer time span.

    By Michael C. Thomsett,

    • 0 comments
    • 3,412 views
  • Got Crypto? Here's How to Use It

    Cryptocurrencies are fast becoming an accepted personal and corporate finance method - much to the chagrin of centralized banks and established financial institutions. The reasons are numerous, but in a nutshell, the decentralization of massive amounts of currency poses a threat to their systems.

    By Kim,

    • 0 comments
    • 2,153 views
  • Option Payoff Probability

    Many options analyses focus on profit, loss and breakeven. These show what occurs on expiration day, assuming the option remains open to that point. But this is not realistic. Most options are closed or exercised before expiration, is calculation of how probable a payoff is going to be, how likely the loss, or the exact neutral outcome (breakeven), are all unrealistic.

    By Michael C. Thomsett,

    • 0 comments
    • 1,777 views
  • How to Open Your Own Trading Office

    Are you ready to break out on your own? Have you been trading for a company for years making tons of money for yourself and others? Are you ready to take home a bigger piece of the pie? If you answered “yes” to these questions then you have the skills necessary to take your passion for trading to the next level.

    By Kim,

    • 0 comments
    • 2,281 views
  • How To Create Your Own Indexed Annuity

    Indexed annuities are a life insurance company product sold by insurance brokers for a commission that is based on the amount deposited into the contract. Contract performance is linked to popular indexes like S&P 500, and early withdrawal penalties typically apply for the first 7-10 years if withdrawals greater than 10% of the contract value are taken each year.

    By Jesse,

    • 0 comments
    • 2,859 views
  • Q&A with Mental Game Coach Jared Tendler

    QUESTION: Thank you for taking the time to participate in a Q & A session with Steady Option. Let’s start with an introduction and a little bit of background on who you are and how you got here.

    By Jared Tendler,

    • 0 comments
    • 2,626 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido