Short term
Trade view / 17 June 2016 at 14:48 GMT

How to get in on the recent bond rally

Product Manager, Options Trader, Educator
Price target:
Market price:

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.

 Source: Saxo Bank


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.

Target: TLT to trade in between $142 and $133.

Time horizon: 25-29 days.

— Edited by Martin O'Rourke

Non-independent investment research disclaimer applies. Read more
Gus1 Gus1
Hi Georgio why you think that this is trade with good probability while reward to risk is well below 1.
Georgio Stoev Georgio Stoev
Low deltas.
Georgio Stoev Georgio Stoev
Gus, forgive for being laconic with above reply. Delta could also tell us about the prob of an option expiring ITM. Since we want to collect from sides, it'd be only possible if the short options expire worthless. Hence if the short options have low delta/ low prob to expire ITM then we have a high prob of collecting, at least as of today:)
You can also apply regression or look at the standard deviation of the price. Have a good weekend!
Gus1 Gus1
Thanks for the response. Good Weekend to you too.


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