Using Put Options for US Treasuries (Bonds)

marathonic

Hi,

I believe that the yields on US treasuries are at (or near) a low at the moment. The 30 year yield is currently 2.56% - meaning that the bond prices are high. When the US start to come out of this recession, I don't see people lending the government money for 30 years at 2.56%. Therefore, these yields should go up - meaning that the bond price goes down.

Bond Rates

I've been looking at my choices to put money on a fall in bond prices and have come up with an ETF (iShares Lehman 20+ Year Treasury Bond ETF, TLT)

I am considering buying Jan 2011 Puts on this ETF.

I've never traded options before but, as I understand it, I purchase 1 contract for Jan 2011 and pick my strike price, e.g. 105. The price of this option contract is $17.70 and each contract represents 100 shares. Therefore, the contract will cost me $1770. Then, at any time between now and Jan 2011, if the price of the ETF drops below $87.30 ($105-$17.70), I'm in profit.

Can someone confirm that this is the case? If so, I'll probably need to look into other methods such as selling the index short (very risky) as the options seem quite expensive.

Mikel

Are they american or european options?

What is the price of the ETF derived from? Is it the front T bond or is it a basket of bonds?
What yield does the strike of 105 represent?
What yield does the breakeven of 87 represent?

Any option will be expensive tbh because vol is so high

johnmd

Hi
I am currently thinking the same think,I was looking at a long position on the double reverse etf,Less leverage than the put option of course,
ProShares UltraShort Lehman 20+ Yr(ETF)

Either that or as you suggested a put option for Jan 10 or 11 perhaps on TLT


On the option price,if the price was to decline to say less than $105 then the option would be in the money and start to increase in value coresponding to the decline X your number of contracts X 100.
Basically every dollar that the ETF looses that is inside your strike price,minus your inital spread and the intrinsic time value etc left on the contract, should represent $100 gain (1 contract controlling 100 underlying shares in the ETF).

silverharp

you will find an interesting historical perspective on what happens to bond prices in a post bubble contraction. It will be a great long term play. Bob is my favouite analyst by a long way


http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10141

DJDC

Your paying a lot of time value for the 2 year expiry. If you think yields are going start increasing on a shorter term I'd look at cheaper alternatives.

Bytheway

What is the strike price wrt Call and Put options ?