Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
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.
[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. |
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% |
Expected move | for 15th September ’23, based on ATM straddle: +/- $3.72 |
IV rank | 30.42% |
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: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.