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nuf2bdangrus (< 20)

Shorting the TLT

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September 06, 2008 – Comments (3)

For months I have been reading that the fundamental analysis shows that the TLT is way overvalued.  See a chart in my last post with a link...there is a long term chart and the explanation of the credit cycle.

 

The TLT peaks when the market panics, thus as the market bounces, TLT falls.  But from an interest rate perspective, the TLT pays negative real interest.  That's a screaming short.  (Gold is a screaming long, but we're fighting artificial forces here)

 

The problem with shorting TLT, is that any market selloff pushes the price higher, as investors don't have an alternative now (they should use cash)

 

The technicals give it a a great risk reward entry point, short term and long term.  YOu could buy puts on it, or buy TBT which is the inverse.

 

As I belive the market will go down, it may push TLT up....although there is overhead resistance here.  But in the longer run, as real interest rates come to play, TLT should fall.

 

Foolish thoughts?

 

 

 

 

3 Comments – Post Your Own

#1) On September 06, 2008 at 11:35 PM, Imperial1964 (97.92) wrote:

I've been thinking about a TLT Put for months now.  Almost pulled the trigger when 10-year rates were 3.5% months ago.  But my biggest risk, in my opinion, is that last I looked I couldn't buy myself enough time to be sure to get through this recession and part-way into a recovery.

Added to that, long bonds are hugely leveraged to the interest rate.   Add the leverage of options to it, and you've got WAY WAY more leverage than I like to handle.

Buying just the minimum 100-share contract would double the volatility of my portfolio, and TLT Puts would be highly correlated to long-only stocks, which made up the rest of my portfolio at the time.  I would either have to free up some cash to reduce the volatilty to keep me sane in this market or I would have to hedge with SPX Puts.

TLT Puts and SPX Puts might be a good pair, unless we have a deflationary depression.

What I'm saying is if you haven't, you should do the math to understand how much a 10 basis point move in the interest rate changes the value of your options.  I was looking at buying way-in-the-money leaps and as I recall I was looking at roughly 1% change in the intrinsic value of the option for every basis point change in interest rates.

I'll revisit the TLT Put idea when we get closer to the end of this bear market.

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#2) On September 06, 2008 at 11:38 PM, Imperial1964 (97.92) wrote:

To clarify, the point of buying way-in-the-money leaps was to reduce the total leverage.

I'd feel much more comfortable shorting TLT directly and just dealing with the interest rate leverage, but the overhead of margin interest and covering the dividends makes that not a viable play.

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#3) On September 07, 2008 at 12:04 PM, nuf2bdangrus (< 20) wrote:

I agree....shorting way too expensive.  Also, you'

re right, shorting is essentially the same play as going long stocks.

 

Seeking alpha posted an article yesterday on why not yet.  The technicals say now.  Perhaps should have done small put position on friday, as market will rally today.  P{erhaps too late.

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