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Market MeasuresTLT: Profile & Trading | Jul 1, 2016
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    Market MeasuresTLT: Profile & TradingJul 1, 2016

    The recent quick bounce back in equities from the Brexit sell off sent Implied Volatility (IV) back down in general and so finding underlyings with a high implied volatility rank (IVR) has been difficult. One area that continues to see higher IV is the Bond market. The yield on the 10 year German Bund went negative and yields on US Notes and Bonds hit multi year lows. The /ZB is the most actively traded Futures contract for the bonds. It is very liquid and the Futures options are also very liquid. The problem for new traders though is that since the cash Bond market trades in 1/32 of a point, so do the Futures. To make things even more challenging the options trade in 1/64 of a point. The notional value is also very high and is currently close to $175,000. TLT, the Bond ETF can provide a good alternative for new traders (as well as IRA accounts). Thinking about TLT we had some questions. How often does TLT stay within a projected 1 standard deviation range? When do high IV opportunities arise in TLT? How has premium selling performed in TLT in the past?

    Our first TLT study covered a time period from 2005 to the present. It determined how often TLT stayed within its projected 1 Standard Deviation (16 Delta call + put) range. We sold the options closes to 45 days to expiration (DTE). A table showed that 77% of the time TLT expired inside the range (versus the 68% projected by the options).

    Our second study in TLT noted every month in which for at least one day IVR was above 35 and where it was above 50. We also noted the 1 week price moves in TLT preceding the beginning of an IVR over 35. A results table showed that in 70% of the months TLT experienced at least one of IVR over 35 and at least one day of IVR above 50 occurred in 49% of the months. The table showed that inflated IV in TLT was preceded by both up and down moves so it can be seen from a rally or a break.

    Our third study in TLT covered that same time period again. Using options with 45 DTE we sold 1 Standard Deviation Strangle and managed at 50% of max profit (if possible). We then compared selling a Strangle every month to selling a Strangle only when IVR was above 35, managing it and re-establishing the a short Strangle when IVR was over 35 again. A results table showed that waiting for higher IVR resulted in a much higher P/L per trade and used less capital since the average time in the trades was shorter.

    Watch this segment of Market Measures with with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our three studies on TLT on how frequently they expire in the projected range, how often they experience higher and the benefits of waiting for higher IVR.

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