TRADE IDEA: TLT SHORT CALL DIAGONAL
With (a) the Federal Reserve telegraphing "lower for longer," but (b) not much lower, given the practical limitations of cutting rates from here; (c) overhead resistance at ~172.50; and (d) the fact that the Fed interest rates will hike rates (modestly or otherwise) "at some point" going forward, I'm looking to short the 20 year + maturity treasury exchange-traded-fund TLT, preferably on strength back toward the 172.50 level.
While I can naturally take a short position via covered put, short via short call vertical, long put vertical, or long put diagonal,* my preference is for a setup that will give me some flexibility to roll short options out for additional time and credit if my timing is off and/or I want to re-up with a short option out in time after a given leg is pulled off at or near worthless. Consequently, I'm opting for a short call diagonal here with a slight twist: laddering out the short calls and buying fairly cheap longs equal to the number of contracts in my ladder. Here, the back month longs are going for .30 a pop, so I'm giving up some credit to define risk and/or make it "street legal" in a cash secured environment, where most brokers won't allow you to sell naked shorts, and for cheaper than I could potentially do a covered put.
That being said, this setup isn't "cheap": buying power effect: 96.10; max profit on fill: 2.97, which is 3.09% ROC, assuming everything expires worthless, and I don't re-up any short legs. Naturally, the ROC%-age will be better if everything expires worthless, and I can re-up with the short call a couple of additional times. The November short call's paying 1.06; the December, 1.34; and the January, 1.47, so it's conceivable I could milk another 2.00 in credit out of the thing for around 5.00 total over the life of the setup, assuming I don't have to roll broken calls out in time.
Alternatives:
(a) Buy the January 21st '22 160P
(b) Sell the January 21st '22 160C
... for a 3.25 credit at the mid price. This creates a static -100 delta short position.
(c) Sell the November 20th 159P
... for a 2.06 credit.
Manage like a covered put, but without being in the stock. This setup should be way cheaper to get into, at least on margin; it's likely a prohibited setup in a cash secured environment for most brokers.
* -- The long put diagonal is generally my go-to when I want to take a short position, but want time for it to work out or to reduce cost basis over time. Unfortunately, long-dated back month high delta long puts were unsatisfactorily illiquid to do this, although maybe I'll have better luck pricing things out during live market hours.
While I can naturally take a short position via covered put, short via short call vertical, long put vertical, or long put diagonal,* my preference is for a setup that will give me some flexibility to roll short options out for additional time and credit if my timing is off and/or I want to re-up with a short option out in time after a given leg is pulled off at or near worthless. Consequently, I'm opting for a short call diagonal here with a slight twist: laddering out the short calls and buying fairly cheap longs equal to the number of contracts in my ladder. Here, the back month longs are going for .30 a pop, so I'm giving up some credit to define risk and/or make it "street legal" in a cash secured environment, where most brokers won't allow you to sell naked shorts, and for cheaper than I could potentially do a covered put.
That being said, this setup isn't "cheap": buying power effect: 96.10; max profit on fill: 2.97, which is 3.09% ROC, assuming everything expires worthless, and I don't re-up any short legs. Naturally, the ROC%-age will be better if everything expires worthless, and I can re-up with the short call a couple of additional times. The November short call's paying 1.06; the December, 1.34; and the January, 1.47, so it's conceivable I could milk another 2.00 in credit out of the thing for around 5.00 total over the life of the setup, assuming I don't have to roll broken calls out in time.
Alternatives:
(a) Buy the January 21st '22 160P
(b) Sell the January 21st '22 160C
... for a 3.25 credit at the mid price. This creates a static -100 delta short position.
(c) Sell the November 20th 159P
... for a 2.06 credit.
Manage like a covered put, but without being in the stock. This setup should be way cheaper to get into, at least on margin; it's likely a prohibited setup in a cash secured environment for most brokers.
* -- The long put diagonal is generally my go-to when I want to take a short position, but want time for it to work out or to reduce cost basis over time. Unfortunately, long-dated back month high delta long puts were unsatisfactorily illiquid to do this, although maybe I'll have better luck pricing things out during live market hours.