WDIS: Back to Cool

Buying Power in Bonds

| Mar 3, 2015
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    WDIS: Back to Cool

    Buying Power in Bonds

    Mar 3, 2015

    It’s the first trading day of the month and Tony and Katie have some housekeeping to do in their portfolio before establishing new positions. The duo is in the midst of transferring accounts, so they quickly recap what will be rolled and what will be held! Their Citigroup © Strangle has been tested and defended several times and still has a high IV Rank. Since they can still get a fair amount of credit on this trade, they will roll it to the new account and hold it until after earnings are announced, which would be within the next few weeks. MSFT, on the other hand, is ready to be closed out. The IV Rank of MSFT is very low, and since there is not premium to sell (no rich option prices), the team is willing to take a scratch trade and re-use the buying power in a more profitable scenario.

    This turns the conversation to TBT. With only a worthless, far OTM (out of the money) option in their portfolio, the Bond ETFs are underrepresented in Katie’s portfolio. And with recent price swings in Bonds, TBT and TLT have seen increases in volatility, which is an opportunity to sell premium.

    In past days, Katie and Tony have tried to establish a position in TLT but have not been aggressive enough in their sell price to get filled. Viewers emailed Tony over the weekend about instead looking at TBT, the Inverse Bond ETF, because it has an equally high IV Rank. TBT and TLT have an inverse relationship, meaning that as TLT increases, TBT decreases. With 46 Days to Expiration-- the optimal time to establish opening options trades--Tony and Katie take a closer look. They analyze a one Standard Deviation Strangle in both underlyings.

    One standard deviation means selling the option on each side that has a 16% probability of being In The Money at expiration. Despite the fact that TBT is less expensive than TLT, a short Strangle in TLT is actually a better use of capital because they were able to collect more credit and the buying power reduction was lower (2.3 k compared to 1.8k). Tony explains that this is due to TBT being a leveraged product, meaning that it moves faster and therefore has a higher margin requirement.

    Ultimately, the duo attempts to sell a one Standard Deviation Strangle in TLT, collecting over 1.00 in credit and expecting volatility to contract so that they can buy the spread to close at a cheaper price, making them a profit. Meanwhile, the rest of Katie’s account is fluctuating around, and in order to gauge if her P/L is accurate, they look at a few of her ITM trades, particularly her NFLX Call spread. It’s important to determine if it’s priced properly because wide markets can skew p/l. Using the puts to determine if the pricing is accurate on the call spread. If the same strikes are being used on the call spread and then PUT SPREAD is 1.00, the Call spread should be trading for 4.00 (since it’s a $5 wide spread). As it’s trading for 3.93, it’s pretty accurate.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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