TLT (20+ Year Treas Bond ) trade before FED meeting

[Vancouver 54]

I'm considering buying at straddle on TLT before the FED meeting next week. The statement will be released on Wed, Sep 18. 

It seems like there is a lot of uncertainty going into the meeting, and IV should increase as we get closer to the event.

 

This looks to me like a great trading event, even better than an earnings one.

VIX should probably also increase as we get closer to Wed.

 

Currently, the Sep 21 weekly 104 straddle trades for 1.89, which implies less of 2% move.

I didn't analyze historical prices, and changes in IV heading into the meeting, but less than a 2% implied move, looks small to me.

 

Any thoughts?

 

[Kim 7,512]

I just checked historical prices, and this seems more or less in line with where it was usually trading. HOWEVER, buying it on Monday or Tuesday and selling on Wednesday might be actually not a bad idea. By holding only 1-2 days, you reduce your theta risk, but have a decent chance of gamma and/or vega gains.

 

I will do some more backtesting, if someone can do the same just to double cross the findings, that would be great.

[Mikael 31]

This isn't much of a backtest, but if you look at the last FOMC meeting on June 18-19. 

 

On June 18, TLT was trading at 113.3, Mr. B wasn't too clear on when or how much they are going to taper, bond takes a dive

3 days later June 21, TLT was trading at 108.4. that's ared $5 drop in 3 days. 

 

Of course we don't know if the reaction will the same this time, but if you are expecting it to move, why not sell a butterfly? you have less theta decay than a straddle and will also benefit from a move.

 

for instance you can sell the 100 103 106 weekly put butterfly and receive 1.39 credit right now. (probably more credit on the 17th), if the stock moves below 101.46 on the 18th you profit.

 

if you take the trade off before Thursday 12pm (the 19th) you should have minimal risk since your max risk is $3 at expiration.

Edited September 14, 2013 by Mikael

[Kim 7,512]

The TLT ATM straddle is currently trading around 1.62. Backtesting shows mixed results, but if I can get it around 1.50-1.55 before the close today, I will probably be a buyer. 

[Vancouver 54]

I'm in the 103.5 straddle for 1.61.

It seems to me that this specific FED meeting is a market mover event.

We'll see... 

[Kim 7,512]

So you intend to hold through the meeting? Just be aware that if there is no or little move, the straddle is be worth around $1 (based on previous weeks prices). TLT has to move around 1.50 for the straddle to make some money.

[Mikael 31]

i sold the 100.5 103.5 106.5 fly for 1.53

[Vancouver 54]

Thanks Kim,

I'll wait for the market action tomorrow morning until 14:00.

My expectation is that IV should go up as we get closer to the announcement.

If I can realize some gain, I may take it, but $1.50 move in any direction the long term bonds isn't very big.

[Hannes Kury 7]

Kim,

 

Mikael's fly and Vancouver's straddle have similar p/l graphs. I know that their vega response is opposite. What is your take?

[Kim 7,512]

The fly is essentially buying the 103.5 straddle and selling 100.5/106.5 strangle (if done with calls and puts). The strangle is worth very little money, so it does not reduce the cost by much, but it will reduce the gains in case of big move. I would probably prefer a straddle.

[Mikael 31]

i sold all puts.

 

my rationale 

 

a) if iv goes up enough tomorrow it will collapse the fly's credit, and i'll buy it back for a small profit

if iv doesn't go up too much tomorrow to take profit, i'll hold it through and hope for a move and gamma gains

 

basically i'm sacrificing some vega to cut my theta a bit. not a huge difference, if the stock moves the straddle will perform better. if it doesn't move the fly will take less of a loss. 

 

if held through the event and the stock doesn't move, the IV crush will affect the fly a bit less than the straddle.

Edited September 17, 2013 by Mikael

[Vancouver 54]

I'm out of the straddle at 1.56, for a 5 cents or 3% lost. Not that painful, but not what I expected.

Prices in the morning did climb all the way to 1.75, which is something we should maybe consider for next time: buy early in the morning (prices were as low as 1.50), and sell a couple of hours later.

We learn something new every day

[Vancouver 54]

And here they are at 1.70 again...

[Mikael 31]

fly went down to 1.48 @ mid. got out a bit too early. oh well small loss.

[Vancouver 54]

Yes, way too early for me as well. The straddle is at 1.90 now.