Over a year ago I thought about buying PUT options on TLT expiring on Jan 20,2012 for 2.6$/share.Basically this investment would have had a huge payout if we had a runaway inflation and interest rates went up significantly on government bonds.
http://stalking-value-stocks.blogspot.com/2010/08/thinking-about-buying-put-options-on.html
Looking back that investment would be worth 0.13$/share....a loss of 95%.
But I think betting against treasury bond yields is still a good idea. In my perfect world I would buy a TLT PUT expiring in 2022 but nobody is willing to sell that long dated PUT option.
So here is an investment which makes all the sense in the world ....but you just need someone willing to take on the opposite side of the bet.
Showing posts with label TLT. Show all posts
Showing posts with label TLT. Show all posts
Sunday, October 16, 2011
Friday, August 20, 2010
Thinking of buying Put options on TLT
Put option is basically an investment that increases in value as the underlying security decrease in price. If the underlying security increases in price or stays constant your worst case loss is the money you paid to buy the option.
Each option has an exercise price and exercise date. European style put options can only be liquidated based on the price on the date of expiry of the option.American put options can be traded all the time.Because of the exercise date there is a decay in value of the option as the exercise date comes closer.Hence with an option,unlike stock, you not only have to be right about the stock price but also the timing when the stock reaches such price.
Recently Seth Klarman gave a speech that can be read here
http://valuestockplus.net/2010/05/20/seth-klarman-notes-from-cfa-institute-speech/
http://www.google.com/finance?q=tlt
Shorting this bond means I am expecting inflation and long term interest rates to go up. To keep the risk of time decay to minimum possible I am thinking of buying the longest dated option available.....which currently is Jan 20,2012.
As of today(August 20th,2010) a Put Option with exercise price of $80 is available for $2.6. As each option contract comes in multiples of 100 the minimum money you have to lay out to buy such an option would be 1*2.6*100 = 260$. Here is how the returns will play out based on the interest rate movements
Hence this is a high risk high return bet. So I would put a small % of my portfolio in this position. But the advantage of this strategy is that if your bet does not materialize the downside is basically what you paid for the option but the upside is tremendous.
Another very important thing to keep in mind is that lot of people have made this trade since 2008 and none of their dire predictions have worked out.Timing is extremely important in this trade.Who knows 2 years from now this option might expire worthless with LTI rates still at sub 3%.
Each option has an exercise price and exercise date. European style put options can only be liquidated based on the price on the date of expiry of the option.American put options can be traded all the time.Because of the exercise date there is a decay in value of the option as the exercise date comes closer.Hence with an option,unlike stock, you not only have to be right about the stock price but also the timing when the stock reaches such price.
Recently Seth Klarman gave a speech that can be read here
http://valuestockplus.net/2010/05/20/seth-klarman-notes-from-cfa-institute-speech/
Klarman is seeking an inexpensive hedge against dollar destruction as he is trying to protect against catastrophic tail risk. His way to hedge against inflation is through way out of the money puts on bonds. If interest rates go to double-digit ranges, he will make a lot of money. As long as the insurance is cheap enough, he will do it.To hedge against inflation I have been thinking of buying out of the money PUT options on TLT(20+ year treasury bond).
http://www.google.com/finance?q=tlt
Shorting this bond means I am expecting inflation and long term interest rates to go up. To keep the risk of time decay to minimum possible I am thinking of buying the longest dated option available.....which currently is Jan 20,2012.
As of today(August 20th,2010) a Put Option with exercise price of $80 is available for $2.6. As each option contract comes in multiples of 100 the minimum money you have to lay out to buy such an option would be 1*2.6*100 = 260$. Here is how the returns will play out based on the interest rate movements
TLT Price vs Long Term Interest Rate
Return in % vs Long Term Interest Rates
Hence this is a high risk high return bet. So I would put a small % of my portfolio in this position. But the advantage of this strategy is that if your bet does not materialize the downside is basically what you paid for the option but the upside is tremendous.
Another very important thing to keep in mind is that lot of people have made this trade since 2008 and none of their dire predictions have worked out.Timing is extremely important in this trade.Who knows 2 years from now this option might expire worthless with LTI rates still at sub 3%.
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