Options Theory: How to Be Wrong and Still Make Money - TLT Edition | Tackle Trading: The #1 rated trading education platform

Options Theory: How to Be Wrong and Still Make Money – TLT Edition

wrong

Let’s take a look at a recent bond trade to discover how I adjusted a put fly gone awry. Throughout the winter wilting in equities, bond prices were booming amid a classic flight to safety trade. As is often the case when fear seizes the Street, stocks become oversold and bonds overbought.

On December 11th, I reasoned TLT was sufficiently stretched to justify deploying an out-of-the-money put fly. The position started out delta negative and theta positive. Take a look at the charts below and see if you agree with my forecast of a pause or pullback for the stock:

TLT weekly
TLT daily

The initial trade was a $3-wide January put fly purchased for 74 cents. With TLT trading at $119, I bought the Jan $113 and Jan $119 puts while selling two of the Jan $116 puts. Said another way, I bought the Jan 113/116/119 put butterfly. The ideal scenario was for TLT to drift lower toward $116 and for a few weeks of time to pass.

Here’s the risk graph of the original trade:

put fly 1

Though TLT did pause as predicted, it only did so for a day or two before ripping higher to $122. The rally carried TLT well outside of my profit zone thus requiring a large selloff to return the position to a profit. Using the risk graph above, look at how far away $122 is from my breakeven. Rather than sitting tight I entered a second fly – the Jan 116/119/122 for a 92 cent debit. The adjustment had two primary benefits.

First: I shifted my upper breakeven point from $118.25 to $120.35. By widening the profit zone I modified the position to recoup its loss much quicker when TLT finally pulled back in price.

Second: I shifted the theta much higher thereby improving the delta/theta ratio. The new position had more exposure to time decay relative to the amount of directional risk I had.

Here is how adding the second fly improved my risk graph:

put fly 2

After making the adjustment, I settled in to wait for some type of pullback toward $120 and below. We finally got it this week. With the long-awaited snap-back finally arriving for stocks, the fear bid in bonds dissipated. TLT has retreated from $122 to $120 and should continue to fall if the stock rebound can persist for another few days.

At $120, TLT has returned to my profit zone, and my losses have been all but recovered. By keeping a cool head and not panicking when bonds went from overbought to overbought(er), I was able to make a logical adjustment that improved my probability of profit. Furthermore, this case study illustrates the power of scaling-in. By pre-planning the potential entry of a second or third fly, I was able to give myself multiple chances of nailing a top and eventual turnaround in bond prices.

The choice now is whether I want to exit swiftly at breakeven and move on or settle in to see if my original forecast starts to prove true.


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

The Options Theory series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Sign up now for a 15-DAY FREE TRIAL #


Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisers, to determine whether such trading or investment is appropriate for that user.

3 Replies to “Options Theory: How to Be Wrong and Still Make Money – TLT Edition”

  1. prizesoflife says:

    Yep, given the price action at the trend line I would’ve anticipated a decline as well, but she broke out the other side on slightly higher than average volume right into established resistance, and has consolidated. Looks like a fake out break out to me. I can see price drifting lower as the broad market deciphers next week.

    I have not traded any butterflies yet, but it appears that you turned the fly into a condor, and essentially a fly is a short straddle with wings. Likewise, a bull put & a bear call make up the fly, but due to the common short strike, we have a peak rather than a plateau.

    I like the idea. Thanks Tyler!

    1. prizesoflife says:

      No downward drift, & no FOBO. Dang!

  2. DavidVelasco says:

    Thanks for the case study! Very creative!

Comments are closed.

Share this

X
Facebook
LinkedIn
Reddit
Pinterest
Telegram
WhatsApp

More Insights

Join the #1 Rated Trading Education Platform

Learn to generate monthly cash flow from the financial markets and how to grow long-term lasting wealth. Tackle Trading is an amazing online community for active traders that is led by seasoned market professionals. Tap into the power of Tackle Trading’s proven trading system and learn how easy it is to make money with the proper coaching and education.

8,800+

Members

100+

Reviews

Ready to take your trading to the next level?

Get in touch today and receive a FREE complimentary consultation.

Let us help you start trading!

Our Pro Membership gives you the tools to tackle all your trading obstacles.

Register for the Master Trader Live Workshop and get the First 15 Days on Us

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.