Paired option strategy on TLT bonds
A paired option strategy on TLT can capture near-term downside from inflation fears while maintaining long-term upside exposure to a growth slowdown.
The argument
The host argued that inflation risks are currently pushing yields higher, but this same shock will eventually cause demand destruction and a growth slowdown, pulling yields back down. Low bond volatility makes structuring a paired trade relatively inexpensive.
The thesis, stress-tested
✓ What validates it
- ✓TLT breaking above the $90.25 level to reach the call breakeven
- ✓A transition in macroeconomic data from inflation concerns to growth deceleration
▸ Risks discussed
- ▸Yields remaining elevated longer than expected, decaying the long-dated call option
- ▸A sudden drop in volatility reducing the value of the options
Hear it yourself
"Patrick, for this week's trade of the week, if inflation keeps pushing yields higher in the short term but ultimately slows growth and pulls them back down later on, how do you trade for that sequence in bonds?"
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