$TLT Butterfly (Oct 1, 2020)

Long end US Treasury yields have been in a downtrend for a LONG time.

Chart showing 30yr yields since 2006

Investors made a lot of money buying these bonds and gaining on capital as the yields headed lower (inverse relation between bond price and yields).

With 30yr @ 1.46% now (was as high as 3% in Jan 2019), how can one play this instrument? Given that Fed is trying to avoid negative rates, how low can 30yr go from here?

For the past 1 month, 30yr has been in the range of 1.322%-1.524%, so clearly it is closer to top end of the trading range in a long term downtrend (current yield 1.462%).

To be long Treasuries and yet not block a lot of capital in the trade, I have put on a Call Butterfly on $TLT 160/170/180 for Nov monthly expiry.

Assuming the 30yrs stick to the previous month’s range, price range of TLT should be roughly between 161.34-167.58 (-1.2% to +2.65%), current price of 163.26.

With elections around the corner, it is possible that there will be a flight to safety, even if it is momentary. This provides an opportunity for making 10%-20% in couple of weeks time.

Risk: Sudden spike in yields and/or change in market growth/inflation expectations.

You can check out this link to get a primer on Butterfly spreads.

Disclosure: I have a position on this trade.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This is not investment advice, please do your research before committing capital.

Leave a Reply

Your email address will not be published. Required fields are marked *