Investing with options - bonds? TLT!

• 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:

• 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

1. Bullish Put Credit Spread:

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:

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:

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

Related articles:

• From zero to hero - buying options
• From zero to hero - selling options

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