30 year bond ETF - TLT & TBT

[SierraRaven]

I buy TLT & TBT. When one goes up, the other goes down. I generate income by selling calls each month against the shares I own. It produces roughly 35 cents per share per month. With the 31 cents per month dividend from TLT, that equals an average of $0.66 per share per month or 11% per year return.
With inflation being a concern, TLT goes down in price while TBT goes up in price, canceling out moves due to inflation.
I would appreciate any advice available on these two ETF's.

 

[emilylynn]

I'd be curious to know what your return is after accounting for slippage. With TBT, it's considerable.

 

[SierraRaven]

TBT has dropped more than TLT has risen percentage wise, but is fairly close dollar for dollar. Since it is a double short, it drops 2% for a 1% rise in TLT. Both end up moving about $0.95.
Because TBT is not an actual short of TLT, I am concerned how they will track against each other over time.
I still have considerable positions to add. I am probably going to continue buying the TLT LEAP calls, but will hedge for inflation with TLT LEAP puts.

 

[GusLevy]

You're trading strategy here is basically a short position against volatility ("short vol trade"). By definition you should not be looking at this trade as a yield generator either in the short term nor the long term by extrapolation: Your trade here will end in tears if you are trying to generate long term income by selling calls. The ultrashort ETFs are great vehicles to make spec bets in the short run but as they are highly levered portfolios they will by definition be very expensive whenever mkt volatility exists - and we are in a very volatile mkt obviously. If trsys trend down with lots of volatility then a long position on both will end up in losses on both. Margin calls whenever TBT trades down is the concept that is most important to you as that will decrease the fund's value but increase the value of the short call options.

Good luck.

 

[SierraRaven]

TLT and TBT move in a range up to $8 in a month. They both return to their 60 day moving average each month so far. I sell calls not at-the-money on TLT, but above the 60 day ma. I sell calls on TBT 10% to 15% out-of-the money and always above its 60 day ma. If TBT moves to the strike price of the call I sold, I buy the call back giving myself full downside protection for TLT. I am never actually short the underlying and I am never margined, so no worries of a margin call.
I do not buy the underlying TLT or TBT, but instead buy deep in-the-money call LEAPS limiting the amount of premium I pay.
Both TLT and TBT moved close to $3 this week. The gain on one cancelled the losses on the other, which is what I am after.

 

[GusLevy]

You are not in danger of the margin calls directly but the levered fund that you are long, TBT, is in danger of margin calls constantly as it must fulfill the margin requirements anytime the leverage exceeds the minimum ratio. In a volatile mkt, the swings will force the fund to liquidate positions and restore cash to fulfill margin requirments constantly which is the inherent long term investing strategy danger that all these double and triple the index ETFs have. Your strategy is not a hedge on inflation and picking up yield by doing so (though the thought is fine) it is simply a trade that pays premium to take on a short volatility position - as all "sell call option" strategies really are. They feel like "free and easy" money because they are priced on option models that are statistically based: Unfortunately, it's the Russian Roulette pay-off model on these trades as it pays 5 out of 6 times but the 1 in 6 payout is a hole in the head.

 

[SierraRaven]

Thanks for your info. I was aware that some ETF's were risky due to low trading volume. I had not read about the deteriorating value of leveraged ETF's due to volatility.
I found a report done by a mathematician concerning these type of ETF's. The lose in value has been over 30% for some.

 

[IndependentlyPoor]

Thanks for your info. I was aware that some ETF's were risky due to low trading volume. I had not read about the deteriorating value of leveraged ETF's due to volatility.
I found a report done by a mathematician concerning these type of ETF's. The lose in value has been over 30% for some.

Can you post a link to that report?

 

[SierraRaven]

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