Log in Open account
International
CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. 
Show more
CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX, or any of our other products work and whether you can afford to take the high risk of losing your money.
Show less
background image

Investing with options - bonds? TLT!

Options 10 minutes to read
MicrosoftTeams-image (3)
Koen Hoorelbeke

Investment and Options Strategist

Summary:  As the allure of bonds re-emerges, the spotlight also shines on sophisticated investment methods like options on bond ETFs, especially TLT. Current yields have reshaped bonds into a promising investment medium, bestowing them with merits such as comparatively lower risk than stocks, bolstered diversification, and a dependable income flow resilient to economic fluctuations.

Investing with options -bonds? TLT!

Introduction

Over the past years, bonds remained somewhat in the shadows for many investors, largely due to the prevailing ultra-low interest rate environment that rendered their yields minuscule. However, the last two years have seen a distinct transformation. For instance, in the US, the 10-year yield surged from a humble 1.15% to a noteworthy 4.75%. And because of the inverse correlation between yields and bonds, the bonds or in particular the TLT bond ETF, is at multi-year lows:
KOHO-2023-10-17-00-TLT-Graph
If you've been following our publications, you'd have noticed a series of articles on bonds in the past few weeks, reflecting their renewed significance as highlighted in our Q4 Quarterly Outlook. But how does one navigate this bond resurgence? Enter TLT, a prominent bond ETF. This article will guide you through the intricacies of leveraging options on TLT, offering strategic insights for both long-term investment and adept trading in the bond market.

Related Articles:

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
 

Trade Setups for Investors

Investors, with a longer-term perspective, might be keen on utilizing strategies that capitalize on broader market trends. Here are two primary setups depending whether you're bullish or bearish on bonds:
 

1. Bullish Long Call:

KOHO-2023-10-17-01-TLT-LongCall
A bullish long call strategy involves buying a call option with the belief that the underlying asset, in this case bonds, will increase in value. This strategy benefits from a rise in bond prices and is limited to the premium paid if the trade doesn't work out.
 
The Bullish Long Call setup presented in the screenshot above is designed for investors who anticipate an upward movement in the TLT (iShares Barclays 20+ Year Treasury Bond ETF). Here's an analysis of the trade:
 
  • Underlying Asset: iShares Barclays 20+ Year Treasury Bond ETF (TLT) is currently trading at $86.11.
  • Option Details: This setup involves buying a call option expiring on September 20, 2024, with a strike price of $77. The premium for this option is $13.35, resulting in a total cost (debit) of $1,335.00 USD.
  • Profit Potential: The beauty of a long call is the potential for unlimited profit. As showcased in the risk graph, as TLT's price rises, potential profit increases without a ceiling.
  • Risk Analysis: The maximum risk or loss an investor can face in this setup is the premium paid, which is $1,335.00 USD. This occurs if TLT closes below the strike price of $77 by the expiry.
  • Breakeven Point: For this trade to break even, the TLT needs to reach a price of $90.35 by expiration (strike price plus premium).
  • Option Greeks:
    • Delta: 0.7951, indicating that for every $1 move in the underlying asset, the option will move approximately $0.7951.
 

2. Bearish Long Put:

KOHO-2023-10-17-02-TLT-LongPut
Opting for a bearish long put strategy means purchasing a put option, anticipating a decline in the value of bonds. This approach capitalizes on falling bond prices and, similar to the long call, the maximum loss is the premium paid.
 
The Bearish Long Put strategy depicted in the image above is for investors who anticipate a downward movement in the TLT (iShares Barclays 20+ Year Treasury Bond ETF). Here's a concise breakdown:
 
  • Underlying Asset: TLT is trading at $86.19.
  • Option Details: The strategy involves purchasing a put option with an expiry date of September 20, 2024, and a strike price of $99. The option's premium is $13.60, making the total cost $1,360.00 USD.
  • Profit Potential: The potential profit from a long put is significant but not unlimited, as it's capped by the underlying reaching zero. The graph visually displays the increasing profit as TLT's price declines.
  • Risk Analysis: The maximum risk an investor is exposed to is the premium paid, or $1,360.00 USD. This is the maximum loss if TLT closes above the $99 strike price at expiration.
  • Breakeven Point: TLT needs to drop to $85.40 by expiration for this trade to breakeven (strike price minus premium).
  • Option Greeks:
    • Delta: -0.8038, signifying that for each $1 decrease in the underlying asset, the option value increases by approximately $0.8038.
 

Trade Setups for Traders

For those with a shorter time horizon and a more tactical approach, these setups offer flexibility across different market conditions. Following are 3 trade-setups depending your (short-term) outlook for bonds, and the TLT-ETF in particular:
 

1. Bullish Put Credit Spread:

KOHO-2023-10-17-03-TLT-BullishPutCreditSpread
This strategy involves selling a put option while simultaneously buying another put option with a lower strike price on the same underlying asset. The goal here is to profit from the premium difference, ideally in a rising or neutral market.
 

Overview

  • Underlying Asset: TLT (iShares Barclays 20+ Year Treasury Bond ETF) is trading at $86.19.
  • Option Details:
    • Short Put: Selling a put option with an expiry of November 17, 2023, and a strike price of $85.
    • Long Put: Buying a put option with the same expiry but a lower strike price of $80.
    • Net Premium: Receiving a credit of $121.00 USD.
    • Profit Potential: The maximum potential profit is the net credit received, which is $121.00 USD.
    • Risk Analysis: The maximum potential loss is the difference between the strike prices minus the net premium received. In this case, it's $379.00 USD ([$85 - $80] x 100 - $121.00).
    • Breakeven Point: The breakeven point for this strategy is $83.79, calculated as the higher strike price minus the net premium received.
    • Option Greeks:
      • Short Put: Delta: -0.4051, Theta: -0.0305
      • Long Put: Delta: -0.1426, Theta: 0.0218
 

2. Neutral Iron Condor:

KOHO-2023-10-17-04-TLT-NeutralIronCondor
The Iron Condor is a strategy that involves four options: selling a lower strike put, buying an even lower strike put, selling a higher strike call, and buying an even higher strike call. This strategy profits in a sideways market where the underlying asset price remains between the two sold strikes.
 

Overview

  • Underlying Asset: TLT (iShares Barclays 20+ Year Treasury Bond ETF) with a current price of $86.10.
  • Option Details:
    • Bull Put Spread:
      • Short Put: Selling a put option with an expiry of November 17, 2023, and a strike price of $82.
      • Long Put: Buying a put option with the same expiry and a lower strike price of $77.
    • Bear Call Spread:
      • Short Call: Selling a call option with an expiry of November 17, 2023, and a strike price of $91.
      • Long Call: Buying a call option with the same expiry and a higher strike price of $96.
  • Net Premium: Receiving a credit of $105.00 USD.
  • Profit Potential: Maximum Profit: The net credit received, $105.00 USD.
  • Risk Analysis: Maximum Loss: The difference between the wider strike prices minus the net premium received. Here, it's $395.00 USD ([$91 - $82] x 100 - $105.00).
  • Breakeven Points:
    • On the lower side, $80.95 (short put strike minus net premium).
    • On the higher side, $92.05 (short call strike plus net premium).
 

3. Bearish Call Credit Spread:

KOHO-2023-10-17-05-TLT-BearishCallCreditSpread
By selling a call option and buying another call option with a higher strike price on the same asset, traders aim to profit from the premium difference in a declining or neutral market scenario.
 

Overview

  • Underlying Asset: TLT (iShares Barclays 20+ Year Treasury Bond ETF) with a current price of $86.10.
  • Option Details:
    • Short Call:
      • Action: Selling (Sell to Open) a call option.
      • Expiry: November 17, 2023.
      • Strike: $88.
      • Price (credit): $1.52 - $1.54.
    • Long Call:
      • Action: Buying (Buy to Open) a call option to hedge against the short call.
      • Expiry: November 17, 2023.
      • Strike: $93.
      • Price (debit): $0.39 - $0.40.
    • Net Premium: A credit of $1.15 per spread, resulting in $115.00 USD.
  • Profit Potential: Maximum Profit: The net premium received, i.e., $115.00 USD.
  • Risk Analysis: Maximum Loss: Difference between the two strike prices minus the net premium received. In this case, $385.00 USD ([$93 - $88] x 100 - $115.00).
  • Breakeven Point: Short call strike plus net premium, which is $89.15.

Conclusion

The bond market's evolving landscape has opened doors to a myriad of trading opportunities. By aligning strategies with market views and risk appetite, both investors and traders can navigate this environment with precision. As always, each trade setup comes with its risk-reward dynamics, making it crucial to be well-informed and adaptable.
 

Related articles:

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article

Disclaimer

 The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International
Products & pricing
Platforms
Accounts & service
General
Other
Legal

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.