Monday, November 23, 2009

TLT-TBT Pair - Adjustment




Since the TLT-TBT pair trade is synthetically equivilent to a Naked Short Strangle on TLT, which is a completely different strategy from my normal CC/CSP positions, I've decided to keep it as a separate position, rather than merge it into my long term TLT position as I originally planned. By keeping it separate, I can better judge how this particular strategy is performing. The Position Summary will also be slightly different and will only include the amount/percentage of income generated.

As mentioned in this months results, there was quite a bit of tracking error between TLT and TBT, with TLT down $1.65 or -1.71%, and TBT up only $0.06 or 0.13%. TBT attempts to correspond to twice the daily inverse of TLT, and does a pretty good job of it on a daily basis. However, over a longer period of time it does not correspond to twice the inverse, as the results above show. Therefore, TBT is not a perfect hedge for TLT.

This position is not an attempt to hedge against a drop in TLT, but rather to take advantage of a trading range, which is what a Naked Short Strangle attempts to do. A Naked Short Strangle on TLT would normally consist of a selling a naked put below the current price and selling a naked call above the current price. Since selling naked calls is not allowed in an IRA, an alternative is to sell a naked put on TLT and a naked put on TBT, which is what this position does.

The following adjustment was made today on the iShares 20+ Year Treasury (TLT) and ProShares UltraShort 20+ Year Treasury (TBT) pair trade . All prices include IB commissions.











DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/20/2009TLTCSP Margin ReturnedCSP 100 TLT @ -94.00 $9,400.00 
11/20/2009TBTCSP Margin ReturnedCSP 100 TBT @ -43.00 $4,300.00 
11/23/2009TLTCSP Margin UsedCSP 100 TLT @ 93.00 ($9,300.00) 
11/23/2009TLTContinued TradeSTO 1 Jan10 93.00 Put @ 1.35  $134.75
11/23/2009TBTCSP Margin UsedCSP 100 TBT @ 44.00 ($4,400.00) 
11/23/2009TBTContinued TradeSTO 1 Jan10 44.00 Put @ 0.90  $90.00


Current Position Summary









CSP Margin Used$13,700.00
Income Generated$467.75
Percent Income Generated3.41%
Annualized Income Generated11.13%
Days Held to Expiration112 days


Trade History

















DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
9/25/2009TLTCSP Margin UsedCSP 100 TLT @ 94.00 ($9,400.00) 
9/25/2009TLTInitial Put OptionSTO 1 Nov09 94.00 Put @ 1.19Expired $119.00
9/25/2009TBTCSP Margin UsedCSP 100 TBT @ 43.00 ($4,300.00) 
9/25/2009TBTInitial Put OptionSTO 1 Nov09 43.00 Put @ 1.24Expired $124.00
11/20/2009TLTCSP Margin ReturnedCSP 100 TLT @ -94.00 $9,400.00 
11/20/2009TBTCSP Margin ReturnedCSP 100 TBT @ -43.00 $4,300.00 
11/23/2009TLTCSP Margin UsedCSP 100 TLT @ 93.00 ($9,300.00) 
11/23/2009TLTContinued TradeSTO 1 Jan10 93.00 Put @ 1.35  $134.75
11/23/2009TBTCSP Margin UsedCSP 100 TBT @ 44.00 ($4,400.00) 
11/23/2009TBTContinued TradeSTO 1 Jan10 44.00 Put @ 0.90  $90.00
1/15/2010TLT-TBT Totals ($13,700.00)$467.75
DTE112 Percent Income/Annualized 3.41%11.13%