TLT Long Treasury ETF- an options straddle idea
TLT is here on a 15-minute chart. Price action is orderly and somewhat related to treasury yield
fluctuations and the value of the existing securities adjusting from those fluctuations. There is
adequate volatility. A straddle options strategy can be employed. Positions can be taken
in both directions. Depending on price action, one leg will rise and the other will fall. Overall
the trades make profit so long as there is volatility in one direction or the other. Additionally,
if the instrument is oversold and upward price action is more likely, the proportions between
the two legs can be skewed toward calls and vice-versa in overbought /overvalued scenarios.
Here in TLT, price is near to support and so relatively oversold. The hypothetical setup
is tipped in favor of the probabilities and expectations for a rise in TLT. Options can be OTM
or ITM depending on trader preference. In this example the calls selected are OTM at the level
of a Fibonacci retracement of the prior trend down and the puts selected are slight OTM at
the horizontal support level and the trade is skewed 70/30 ( by
USD
) toward the calls.
For a more astute explanation see the webpage from the link
fluctuations and the value of the existing securities adjusting from those fluctuations. There is
adequate volatility. A straddle options strategy can be employed. Positions can be taken
in both directions. Depending on price action, one leg will rise and the other will fall. Overall
the trades make profit so long as there is volatility in one direction or the other. Additionally,
if the instrument is oversold and upward price action is more likely, the proportions between
the two legs can be skewed toward calls and vice-versa in overbought /overvalued scenarios.
Here in TLT, price is near to support and so relatively oversold. The hypothetical setup
is tipped in favor of the probabilities and expectations for a rise in TLT. Options can be OTM
or ITM depending on trader preference. In this example the calls selected are OTM at the level
of a Fibonacci retracement of the prior trend down and the puts selected are slight OTM at
the horizontal support level and the trade is skewed 70/30 ( by
USD
) toward the calls. For a more astute explanation see the webpage from the link
Trade active:
Trade active:
Based on the setup on the chart here is the chart now:
Assume the stop loss was set at 20% for each trade.
In 48 hours the call options value for 7 @ 96 strike for mid March went from
$150 each to open the trade to $120 at the stopped out level. The realized loss would have been $210. In the same time the put options went from $ 135 to $ 170 and 3 options for an unrealized profit of $ 105 on $ 405. Overall the pair of trades would only have the put options running and would be $195 in unrealized profit for a net unrealized return of 16.8 % for those two days.
Moving forward, if the price of TLT falls, the remaining leg will gain continuously as it is now in the money. On the other hand, if price reverses and hits its 20% stop loss the whole trade will be a loss. One approach is if the trade is down to only one leg with no hedging from the other and there is an unrealized profit, close down the remaining leg and hold the profit for the next setup.
A condor option setup on the other hand would be employed to try to gain profit from expected low volatility and a range-bound price action for instance inside the high volume area of a volume profile or in between two moving averages or anchored VWAP bands as a means to lower risk and optimize potential pofit overall
Assume the stop loss was set at 20% for each trade.
In 48 hours the call options value for 7 @ 96 strike for mid March went from
$150 each to open the trade to $120 at the stopped out level. The realized loss would have been $210. In the same time the put options went from $ 135 to $ 170 and 3 options for an unrealized profit of $ 105 on $ 405. Overall the pair of trades would only have the put options running and would be $195 in unrealized profit for a net unrealized return of 16.8 % for those two days.
Moving forward, if the price of TLT falls, the remaining leg will gain continuously as it is now in the money. On the other hand, if price reverses and hits its 20% stop loss the whole trade will be a loss. One approach is if the trade is down to only one leg with no hedging from the other and there is an unrealized profit, close down the remaining leg and hold the profit for the next setup.
A condor option setup on the other hand would be employed to try to gain profit from expected low volatility and a range-bound price action for instance inside the high volume area of a volume profile or in between two moving averages or anchored VWAP bands as a means to lower risk and optimize potential pofit overall
Comment:
The overall trade was weighed in the direction of a trend up as that is what I expected with an imbalance split of 70/30. If instead, the legs were evenly balanced dollar on dollar the net unrealized return would be quite a bit higher than 16.8% over two days. Next time I might do that instead or assess overall direction on a longer time frame to get a better snapshot of it :(
Trade active:
Suffice it to say, to protect against an unrealized profit evaporation on a TLT reversal to the upside, I have raised the stop loss to nearly breakeven on the unilateral TLT put side of it in order to insure against that reversal.
Comment:
If you getting an understanding of the straddle and have a science or engineering background this is the simple analogy- find you have an acid and a base, no matter what extreme of pH you throw into the combination, the extreme ph will be buffered into nothingness so long as the combined mass of the acid/base combination is large compared with the extreme pH mass added ( discounting water and salts derived from the reaction et cetera)