Some of my weekly tales are philosophical, and others are practical. Some illustrate what smart traders could or should do while others chronicle what I did do. Today will be one of the latter variety. I recently provided two such retrospectives on recent trades in FedEx and the Euro.

Let’s keep the good times rolling with another episode. This time we’re trading bonds.

Bonds. Treasury Bonds.

While there may be plenty of volatility in the land of bond futures, there’s little to get excited about for ETF-toting gunslingers like me. In reality, the only bond funds worth actively trading are those tracking the long end like TLT. In fact, it has no equal. So, let’s not quibble. TLT is the only bond ETF worth trading. There, I said it.

Fortunately, it’s liquid and boasts option strike prices aplenty with narrow bid-ask spreads. Since I’m an inflation and interest rate bull, my default bias on TLT is bearish. That is, I expect it to trend lower over time. And that means I’m always on the lookout for low-risk entries to deploy negative delta trades.

My weapon of choice is bear call spreads, but sometimes TLT makes it tricky. When implied volatility is bumping along the lower end of its one-year range (like recently), it can be challenging to scrape together enough premium in OTM calls to make a credit spread worthwhile. Allow me to share how I traded if in June and July. This will illustrate three key principles: how to scale-in, when to roll-out, and how options when cheap can pay out.

May 24th – It Begins

TLT tagged a new low for the year on May 17th, and I was looking for a chance to re-deploy bearish trades. That opportunity presented itself when TLT scored a rally to $119 on May 24th. Given the tendency for rallies to get swiftly rejected, I decided to wade into the waters by selling a July $122/$125 bear call spread for 33 cents. I reasoned TLT would have trouble vaulting above $122 because it was a pivotal old support level just itching to become resistance.

Just in case I was early, I entered a partial position.

I’m a Dum-Dum

Sure enough, TLT continued rising. May 25th wasn’t too bad, but the squeeze on the next trading day (29th) was utterly ridiculous. Due to the extremity of the move, I entered another batch of  July $122/$125 bear calls on the 29th for 66 cents or double the initial premium received on the 24th.

My entry on the 29th was early in the day. Had I waited I probably could have sold the spread for 90 cents or better.

You may notice that TLT actually lifted above my short $122 strike. With core positions like this, I position small enough so that I’m comfortable letting my credit spreads move ITM.

Now I have two tiers of July bear calls. One scored 33 cents credit, the other 66 cents. By the way, my typical target is 5 cents for the first batch and 33 cents for the second.

Hallelujah

Fast forward to June 6th. Following the super spike, TLT sunk like a stone. Within six trading session of scaling into my 2nd tier, the bear call dropped back to 33 cents allowing me to close that tier. To recap, I entered at a 66 cent credit and exited at a 33 cent debit, thus capturing a 33 cent gain on a $3-wide vertical.

I’m now up money in a trade that I otherwise would be breaking even in. Why? Because I scaled-in. I used adverse movement to my advantage. At this stage, the hope is TLT settles in allowing the $122/$125 bear call to continue dwindling in value to 5 cents.

Unfortunately, it didn’t behave.

Roll Out

Let’s jump ahead to July 10th. Expiration is fast approaching and with TLT sitting right at $122, my July $122/$125 bear call is perched at-the-money. This is a precarious position. Gamma risk is sky high, and the rate at which I can win or lose is elevated. Rather than brave the final few days I punted to August. That is, I rolled out by closing the July $122/$125 bear call spread and opening the Aug $125/$128 bear call.

The July trade was closed out at 74 cents, resulting in a 41 cent loss on that tier. The Aug $125/$128 bear call paid a 31 cent credit. Does that mean I lost money overall in July? Yes. My second tier gained 33 cents, but the first tier lost 41 cents. So negative 8 cents overall. But, whatever. TLT went ape-crazy to the upside.

Vindication

By July 18th, TLT has started falling afresh. The fall was sufficient to drop the Aug bear call from 31 cents to 15 cents. Since I had captured 50% of my max profit in such a short period I elected to exit with the hopes that TLT may setup again later for re-entry.

Then, two days later July 20th, TLT gapped lower and fell like a rock. While assessing Aug options for re-entry, I discovered there was minimal premium available. The IV rank was nestled near zero, so I built a put calendar spread instead. I purchased the Sep ITM $121 put and sold the Aug $119 put against it. The net debit at entry was $2.12.

And that brings us to today. Bonds plunged and the put calendar launched to $2.55 in value. Not bad for one day’s work. At this stage, I could scale-out of half to lock-in some of the gains and let the other half ride – or simply let the whole thing ride for a bit longer. With TLT at $119.30, it’s in the dead center of my profit range.