In late March, as the U.S. 20 year Treasury Bond etf (TLT) bounced off of 52-week lows, after a 9 month, nearly 20% peak to trough decline, we took a bullish view, looking for a possibly gap fill back to $130 in the coming months. Treasuries have been volatile since, to say the least, with an initial move in the TLT to $125, a check back to $120, and in the last few weeks a move back to $125 with a breakout above the prior 2017 high:
TLT ($120.50) Buy June 120 / 130 call spread for $2.40
Buy 1 June 120 call for 2.80
Sell 1 June 130 call at 40 cents
Break-even on June Expiration:
Profits: up to 7.60 between $122.40 and 130 with max gain of $7.60 above $130
Losses: up to $2.40 between $120 and $122.40, with max loss of 2.40 (or 2% of the etf price) below $120.
Rationale: This trade offers a potential 3 to 1 payout, risks 2% of the etf price and is already 50 cents in the money. Options prices in TLT are some of the cheapest vol in the board for a major risk asset
With the TLT at $125.75, above the mid-point of the call spread and less than two weeks to expiration it’s time to consider managing a winning trade as it is worth more than 2x what the trade cost, or about $5.75. There’s not much going on with this trade other than it will trade like stock from here on out as it’s closing in on 100 deltas as we get closer to June expiration. Therefore it makes sense to take profits for those happy with this bounce. For those that want to continue to target that gap fill back to 130, those profits can then be rolled up and out.
With the July 125/130 call spread costing 1.60 you can book 1.75 in profits with a chance to make an additional 3.40 if TLT is at or above 130 on July expiration.