Log in Open account
Australia
What are your options - using TLT as a (inverse) proxy for the 10 year yield

What are your options - using TLT as a (inverse) proxy for the 10 year yield

Equities
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Explore the dynamics of the U.S. Government Bonds 10-YR Yield and its relationship with the TLT ETF. Delve into diverse strategies, ranging from bullish over neutral to bearish stances, suitable for various market outlooks on the 10-year yield.

What are your options - using TLT as a (inverse) proxy for the 10 year yield


Recently, the U.S. Government Bonds 10-YR Yield has captured media attention. Our Senior Fixed Income Strategist, Althea Spinozzi, discusses potential opportunities in her article "Keep calm and consider bonds."

For those interested in tapping into the dynamics of the 10-YR Yield, derivative products like the TLT ETF offer compelling alternatives. Our focus is directed towards trading options on this ETF.

[Editor's Note:] We'd like to provide a clarification regarding the relationship between TLT and the U.S. Government Bonds 10-YR Yield. While the title/article may suggest that the TLT ETF serves as a direct proxy for the 10-YR Yield, this is not accurate. The TLT ETF specifically tracks the performance of U.S. Treasury bonds with maturities primarily exceeding 20 years. Though it offers insights into the broader bond market and is influenced by changes in long-term interest rates, it is not a direct representation of the 10-year yield itself.

The U.S. Government Bonds 10-YR Yield

Often referred to as the "10-year yield," this metric is a pivotal benchmark interest rate reflecting the return on the U.S. government's 10-year Treasury notes. It not only serves as an essential barometer for the health of the U.S. economy but also acts as a foundational touchstone for global financial markets. Its fluctuations have far-reaching implications, influencing diverse asset classes from mortgage rates to equity valuations.
 

TLT - iShares 20+ Year Treasury Bond ETF

The TLT ETF offers insights into the performance of U.S. Treasury bonds, especially those with maturities exceeding 20 years. Its trajectory is closely tied to bond prices. As bond prices ascend, associated yields, such as the 10-year yield, descend, and the converse holds true. This seesaw effect between bond prices and yields forms the bedrock of the fixed income markets.
 

The inverse relationship of TLT and the 10-year yield

A surge in the 10-year yield, indicative of plummeting bond prices, usually signals a downturn in TLT, given its alignment with long-term bond price movements. On the flip side, a dip in the 10-year yield, suggesting climbing bond prices, often aligns with an upswing in TLT. This interplay between TLT and the 10-year yield echoes the overarching dynamics of bond pricing, where price and yield are intrinsically counterbalanced.
 

Bulls, bears and everything in between

The last few weeks the IV rank of the TLT-etf is rising, which makes it an interesting opportunity to sell premium on them. The higher the IV-rank, the more premium that is being payed for options and the more likely there is room in the future that options-prices might go lower (and since we're selling options, we want those prices to go lower, once we sold them).
 

1) Bullish on the 10yr yield - bearish on TLT - bearish call credit spread


In situations like this, we have to be very clear in our language, as being bullish on the 10yr yield, means being bearish on TLT, and the other way around.
This strategy involves selling a call option at a certain strike price and buying another call option at a higher strike price. Both options have the same expiration date. This strategy is used when the trader expects the underlying stock to fall moderately within a certain range (staying below the lower strike)

  • Buy to Open TLT 15-Sep-23 98 Call
  • Sell to Open TLT 15-Sep-23 93 Call
This is a bearish credit call spread on TLT with an expiration date of September 15th, 2023. Here's a breakdown of the trade:

1. Strategy: A Bearish Credit Call Spread is a bearish strategy that involves buying a call option and selling another call option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate decline in the price of the underlying asset.

2. Trade setup: In this case, the trader is buying to open a call option on TLT with a strike price of $98 and selling to open a call option with a strike price of $93. Both options expire on September 15th, 2023.

3. Premium and risk: The trader is receiving a net premium of $1.78 per share, for a credit of $178 (since each contract represents 100 shares). This is also the maximum profit of the trade. The maximum risk is $322, which is the difference between the strike prices ($5) minus the net premium received ($1.78), multiplied by 100.

4. Breakeven point: The breakeven point at expiration is $94.78, which is the lower strike price plus the net premium received.

5. Implied volatility (IV) rank: The IV Rank is 30.42%, which is above 20% which we use as an indicator on whether to sell or buy premium.

6. Days to expiration (DTE): There are 28 days left until the options expire.
 

2) Neutral on the 10yr yield - neutral on TLT - iron condor

If you think that TLT will stay in a range the coming month, consider an iron condor. This strategy involves selling a call spread and a put spread on the same stock/etf with the same expiration date. The goal is for the etf to stay between the strike prices of the sold options. This strategy is used when the trader expects the underlying stock to trade within a certain range until expiration.

Here's a possible setup:
  • Buy to Open TLT 15-Sep-2023 107 Call
  • Sell to Open TLT 15-Sep-2023 97 Call
  • Sell to Open TLT 15-Sep-2023 90 Put
  • Buy to Open TLT15-Sep-2023 80 Put

Reason

High implied volatility (IV) in anticipation of Jackson Hole meeting event next week

Expectation

Limited movement in TLT

BEPs on expiry

Profit between $88.83 and $98.17

Max risk

If you get a premium of $1.17 the max risk/loss would be $10 - $1.17 = $8.83 per share. 1 contract = 100 shares. Max Risk/Loss = $8.83 * 100 = $883.

Probability of profit

59.61%
(on expiration, based on delta's of the short positions)

Expected move

for 15th September ’23, based on ATM straddle: +/- $3.72

IV rank

30.42%

 

3) Bearish on the 10yr yield - bullish on TLT

If you're think that the 10yr yield will retreat in the coming month, then you might consider a bullish strategy on TLT, like the credit put spread, which aims to take a profit, while limiting the potential downside.

Here's what it looks like:

  • Sell to Open TLT 15-Sep-23 94 Put
  • Buy to Open TLT 15-Sep-23 89 Put

1. Strategy: A bullish credit put spread is a bullish strategy that involves selling a put option and buying another put option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate rise in the price of the underlying asset.

2. Trade setup: In this case, the trader is selling to open a put option on TLT with a strike price of $94 and buying to open a put option with a strike price of $89. Both options expire on September 15th, 2023.

3. Premium and risk: The trader is receiving a net premium of $1.55 per share, for a total credit of $155 (since each contract represents 100 shares). This is also the maximum risk of the trade. The maximum loss is $345, which is the difference between the strike prices ($5) minus the net premium received ($1.55), multiplied by 100.

4. Breakeven point: The breakeven point at expiration is $92.45, which is the higher strike price minus the net premium received.

5. Implied volatility (IV) rank: The IV Rank is 30.42, which is well above the 20%-mark which we use as an indicator on whether to sell or buy premium.

6. Days to expiration (DTE): There are 28 days left until the options expire. 

©barchart.com
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia
Products & pricing
Asset Management
    Platforms
    Accounts & service
    General
    Other
    Legal

    Trading can result in losses. Please ensure you understand the risks.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

    Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

    Please click here to view our full disclaimer.