Last week I got exercised on some calls that I had sold short as part of a spread in the TLT on a thesis that bonds were overbought and would soon be coming down to earth. The particular structure I had chosen was a 50/50 bet as far as probability of profit, which based on the extreme overbought levels was a risk I wanted to take. That position would have been profitable again at the end of last week, but no regrets. I must move on.
I still felt the same way when I was covering the TLT shares that I was assigned last week, but I didn't want to expose myself to the level of risk as my last "victory spread". I still have no idea why they call it that. Anyway, I decided to dip my toe back in by going long the March '15 monthly TLT 135 put for $3.00 net debit, when the TLT was about 135. I entered this net debit with the following plan for exit and/or expansion. I put in an alert for TLT at 138 on the high side, and 131 on the low side. The 138 alert, which would've been my stop, as the short term decline would've been invalidated by the rise of TLT above 138. And the 131 alert which would be my catalyst too turn my long TLT 135 puts into a butterfly, and locking a profit into the trade.
I was fortunate enough to get TLT close enough to 131 after the release of the Friday jobs number to sell the 131/127 Mar '15 put 2:1 ratio spread for 4.69 credit.
What that means is that I now have the 135/131/127 TLT Mar '15 put Butterfly on for a $1.69 credit which is also my max risk.
In other words, baring any early exercise/assignment of any of the options involved in the spread, I will make at least $1.69 credit no matter what TLT does.
I will update this trade on the Small Time Trader Facebook.
Feel free to drop comments or questions. I love a good conversation. Let me know what works for You!
Good Luck trading!
STT
TLT 135/131/127 March '15 put butterfly sold for $1.00 net credit above the 1.69 that was locked in by legging in. So, I originally bought just the 135 put for $3.00 debit, sold the rest of the butterfly for 4.69 credit, and closed the trade for $ 5.69 credit. That's a profit of $2.69.
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