While equities, a risky asset, saw prices slump over the past week, prices of bonds have rallied since the beginning of the month some 4.5%. As the rally took place, so did the volatility in the options premium for TLT- the iShares Barclays long-term bond tracker. It almost sounds like an oxymoron that rising prices are leading to increased anxieties (volatility) in the market for bonds have a negative correlation with equities.
With volatility extended trading near a 52-week high, we are going to sell a $2-wide iron condor with expiration July 15. The IC is slightly unbalanced, not equal distance from the market, as we allow for bonds to rally a little further, in case the Brexit takes place.
Probability is also high for this trade. The short options have deltas of .18 for the calls and -.34 for the puts.
Management and risk description
As it is a defined risk strategy, please realign with your own risk tolerance and allocation.
For example, we would take 1% risk of the account value.
Underlying price: TLT @ $135.70
Sell -1 Condor TLT 15 Jul 16 142/144/133/131 Call/Put @$0.83
Buy 1 15 Jul 16 131 Put at $0.75
Sell 1 15 Jul 16 133 Put at $1.37
Buy 1 15 Jul 16 144 Call at $.44
Sell 1 15 Jul 16 142 Call at $.65
Net Credit $0.83
Maximum profit @expiration $0.83
Maximum loss @ expiration $1.17
ROR = 0.83/1.17 = 70%
Breakeven points at expiration: $142.83 and $132.17
Entry: Today, you may need to work the order leg per leg. Start with the long legs first.
Stop: no stop.
TLT to trade in between $142 and $133.
— Edited by Martin O'Rourke
Non-independent investment research disclaimer applies. Read more