Online Trading Academy has its roots in the largest trading floor in the Western US, founded in by Eyal Shahar.

Independent traders needed training to be successful in their investments, and soon a teaching model was born. Enriching lives worldwide through exceptional financial education. Many people think of put and call options as applying to stocks. But most exchange-traded funds also have available options. This includes ETFs that represent assets other than stocks — including bonds.

For example, the ETF called TLT owns year and year U. Owning shares of TLT means indirectly owning those bonds. On the first of each month, the fund management sends out a check or a credit to your brokerage account for the interest earned on the bonds for the previous month. The prices of those government bonds are pretty volatile. This might seem odd, but in fact, the long-term treasuries do change in price quite a bit. This is partly because of their long-term maturities magnifying differences in interest rates over many years of remaining payments.

But apart from that, US treasuries have a special status as the ultimate destination for a flight to safety. When investors anywhere in the world are worried about the value of other kinds of investments they hold, some of them will sell those assets and look for a safe haven for the money.

The save haven investors often choose are Treasuries. When they think the storm has passed, they will sell those treasuries and buy riskier assets again. This pushes the prices of US treasuries up and down pretty significantly.

And that volatility leads to a lively market in the put and call options on TLT. So the prices of treasuries can certainly drop as well as rise. And being currently at all-time high price levels which translates into all-time low interest yields , there is little or no room left to the upside. After all, it was also true that TLT was at all-time highs in , and again in , and At some point, the prices of bonds could go so high that people who buy them get a negative yield — they are paying the government to borrow money from them.

It is happening already in Japan, Sweden, Switzerland, Denmark and for borrowers from the European Central Bank. Treasury bond yields are as low as they can get.

A low-risk way to short Treasury bonds - MarketWatch

But suppose that you believed that U. You could sell the ETF short.

Trading Bonds Using Options

Nice, but like all short positions, that one would have unlimited risk. We know that bond yields have to rise, and therefore that bond prices have to fall — but when? And how much higher might prices go before then? So, how do you profit from a drop in bond prices if it does occur, without being hammered too badly if the impossible happens again?

Option strategies could be an answer. Using a small amount of risk capital for bearish option strategies on TLT will pay off well if bonds do drop in price within their expiration timeframe. Many option strategies have inherently limited risk.

This includes the simplest bearish strategy of all — buying longer-term put options. Puts go up in value when the price of the underlying asset goes down. If the underlying asset rises in price instead, the puts will lose value.

But the amount risked is only the price of the puts, which is a small fraction of the value of the ETF. This is in contrast to the unlimited risk involved in selling the ETF itself short. My point today is that options can be used to speculate on bonds in a limited-risk strategy.

In fact, this applies to all sorts of assets through the use of ETFs. Celebrating 20 Years Transforming Lives for Two Decades Online Trading Academy has its roots in the largest trading floor in the Western US, founded in by Eyal Shahar. Learn Programs Core Strategy Extended Learning Track Mastermind Community Specialty Courses Assets Stocks Forex Futures Options. Lessons from the Pros Calculators Financial Education Center Power Trading Radio Free Online Trading Courses.

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Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.

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