Fed Tapering Raises Bond Concerns
With the Federal Reserve on course to taper its purchases of Treasury securities, here are two ways for investors in the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT) to hedge against greater-than-13% declines between now and late December.
1) Hedging With Optimal Puts
Higher cost, but uncapped upside.
These are the optimal puts*, as of Wednesday's close, to hedge 1000 shares of TLT against a greater-than-13% drop between now and December 20th.
As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was 1.12%.
2) Hedging With An Optimal Collar
Lower cost, 13% upside cap.
If you're willing to cap your potential upside at 13% between now and December 20th, this is the optimal collar to hedge 1000 shares of TLT against a greater-than-13% drop over the same time frame.
As you can see at the bottom of the screen capture above, the net cost of this collar, as a percentage of position value, was 0.62%.
If you want to pay even less to hedge, you can use a larger decline threshold, or a lower cap.
Possibly More Protection Than Promised
*Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance PhD to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones.
**Optimal collars are the ones that will give you the level of protection you want at the lowest net cost, while not limiting your potential upside by more than you specify. The algorithm to scan for optimal collars was developed in conjunction with a post-doctoral fellow in the financial engineering department at Princeton University. The screen captures above come from the Portfolio Armor iOS app.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long optimal puts on TLT