Check out the top 4 stocks to watch in October 2022
tastytrade logo
uploaded image

Jul 14, 2016

What is TLT and How Does It Work?

By:Sage Anderson

Even if you're not trading bonds every day, it’s an important sector for every market participant to monitor. Given the current investment environment, it's arguable this assertion has never been more true than today.

One reason this is true is due to Negative Interest Rate Policy (NIRP). The introduction of negative interest rates highlights just how far some of the world's central banks (Japan and Germany, to name two) are willing to go to institute their vision of monetary policy.

Living under a negative interest rate regime means that instead of a financial institution paying you for holding your savings, you pay them (insert shocked emoticon face here). This is one of the reasons the US bond market (which does NOT have a negative interest rate) has been rallying. Money moves out of negative interest rates into positive interest rates.

While the bond market may be a bit overwhelming (and capital prohibitive) for many new investors, bond ETFs can be a lot more easily digestible. And with interest rates (and potential changes in them) having such a large influence on the market, bond ETFs may offer more opportunity than usual in the coming months.

If you're new to the bond world, you may want to check out this blog post from earlier in the year.

Today’s post focuses on TLT, a bond ETF that was recently featured on an episode of Market Measures. The TLT inventories in its portfolio a group of longer-dated bonds that are 20 years (or greater) in terms of maturity date. As the bonds in TLT pass under 20 years, TLT administrators then sell those bonds and roll into other bonds with the targeted maturity.

As you might expect, the TLT is highly correlated to real bonds in terms of price returns. The chart below shows the correlation between TLT and /ZB, the latter being the ticker for the 30-year US Treasury Bond:

On Market Measures, hosts Tom Sosnoff and Tony Battista present valuable TLT data that was uncovered by the tireless work of the tastytrade research team.

Using TLT data from 2005 to present, the first study looked at 45 days-to-expiration (DTE), 1 standard deviation expected range strangles, and examined how often TLT expired inside or outside the expected range. This particular study showed that on 77% of occasions the TLT expired within the actual range of the strangle - meaning that the results suggested short premium trades have had a higher probability of success over that period in TLT.

The next two studies examined how often the TLT achieved an Implied Volatility Rank (IVR) above 35 or 50 at least once in a month, and counted those instances. Then, the last study analyzed how two different trading strategies would have performed - the first that sold strangles on the 1st day of every month irrespective of IV rank and the second strategy selling strangles only when IVR was above 35 (among other parameters outlined on the show).

While both of the above strategies performed well, the one that focused on selling strangles only when IVR in TLT was above 35 had a much higher average P/L per trade (positive $37.00 versus negative $0.03).

It should be noted here that TLT has of course been steadily increasing over much of the time period included in the studies. The TLT acts the same as an actual bond in terms of its relationship between price and yield.

As interest rates go down, the TLT will go up in price - which is why the TLT has risen over much of the last 10 years. Correspondingly, the TLT would therefore move lower as interest rates move higher.

This must also be kept in mind when considering the above studies, because if interest rates ever go up (it has to happen sometime!), then the TLT could actually start sliding. And as we all know, volatility performs much differently when the underlying is going lower, as opposed to grinding higher.

The TLT may or may not fit into your risk profile or strategic approach, but at a minimum adding it to your watch list should certainly increase your awareness of the bond markets, and potential opportunity therein.

If you have any more specific questions on TLT we hope you'll follow up at

In the meantime, the links below may also be useful if you are interested in learning more about bonds, bond ETFs, or the TLT.


Market Measures: TLT Profile and Trading

Option Jive: Trading Bonds with ETFs

Market Measures: Bond ETFs & Interest Rates

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.