This morning it looked like bonds might continue to rally after news of the latest earthquake off the coast of Japan—but traders apparently discerned an all-clear signal in the absence of reports of further damage to the country’s nuclear facilities. TLT later retreated back to this morning’s lows and is still more than $1.50 off Tuesday’s closing price.
Considering how unpredictable the markets have been today, not to mention the difficulty we’ve had getting good fills on TLT option spreads, anyone still in this month’s Bonus Trade portfolio might consider stopping out here rather than trying to manage an increasingly complex TLT position into expiration week.
Anyone willing to risk staying in for the chance to recoup some of the current 12% to 17% loss (depending on which adjustment path one has followed) might consider buying the TLT Apr/May 89 calendar in sufficient quantity to offset at least half, and perhaps as much as two-thirds, of current downside delta risk. The front- to back-month IV ratio is better in the calls, but note that it’s important to keep an eye on the extrinsic value of the short in-the-money contracts as expiration approaches. Anyone worried about assignment might want to use the put calendar instead.
A third idea, for anyone expecting TLT to bounce back from current near-term oversold conditions, would be to sit tight for now. But just to be perfectly clear—this would be categorized as a speculative directional play and thus falls outside our core market-neutral strategy.
As usual, these Bonus Trade ideas are for the interest of more experienced and risk-tolerant members. Nothing will be autotraded, and there will be no further follow-up.