Buying U.S. Treasury Bonds "for Free": Selling TLT Put Options

$iShares 20+ Year Treasury Bond ETF(TLT)$ $Direxion Daily 20 Year Plus Treasury Bull 3x Shares(TMF)$

On the macroeconomic front, the U.S. economic data has finally started to cool down!

On Tuesday, the focus of the latest U.S. data was primarily on the latest labor force indicators. The Job Openings and Labor Turnover Survey (JOLTS) released by the U.S. Bureau of Labor Statistics showed that the number of job openings at the end of April 2024 was recorded at 8.059 million, the lowest since March 2021 and significantly below the market expectation of 8.37 million. The March data was also revised down from 8.488 million to 8.355 million.

This has reduced the ratio of job openings to unemployed persons to 1.2:1, the lowest level since June 2021. It should be noted that this ratio is a number closely watched by Federal Reserve officials, which peaked at 2:1 in 2022 but has since slowed significantly.

The CME's FedWatch tool shows that the market currently estimates the possibility of the Federal Reserve cutting interest rates in September to be as high as about 65%. In contrast, this expectation was less than 50% just last week.

The change in the market's expectations for the Federal Reserve's interest rate cut is particularly evident in the recent trend of U.S. Treasury yields. Known as the "global asset pricing benchmark," the yield on the 10-year U.S. Treasury bond has plummeted by more than 25 basis points in just a few recent trading days.

U.S. Treasury yields of all maturities fell again on Tuesday. Specifically,

• $US2Y(US2Y.BOND)$ the 2-year U.S. Treasury yield fell by 3.5 basis points to 4.779%,

• the $US5Y(US5Y.BOND)$ 5-year U.S. Treasury yield fell by 5.8 basis points to 4.351%,

• the $US10Y(US10Y.BOND)$ 10-year U.S. Treasury yield fell by 5.9 basis points to 4.332%,

• and the $US30Y(US30Y.BOND)$ 30-year U.S. Treasury yield fell by 6.1 basis points to 4.477%.

U.S. Treasuries may be poised for a turnaround as U.S. economic data weakens.

Tigers who are bullish on U.S. Treasuries often worry about the substantial cash required to invest in them. At this time, set a put option selling strategy can yield higher profits compared to stocks, all without tying up significant cash reserves.

What is Selling a Put Option?

Simulated options strategy to go long on US Treasuries using the TLT ETF

The $iShares 20+ Year Treasury Bond ETF(TLT)$ is currently trading at 92.8. This ETF offers investors exposure to long-term U.S. Treasury bonds, making it an ideal vehicle for those looking to capitalize on shifts in the bond market."

Taking selling at-the-money options as an example, investors can choose to sell put options with an exercise date of July 5 and an exercise price of 92.5. If the price of TLT does not fall below 92.5 yuan before July 5, the investor will successfully obtain a premium of US$170.

By selling in-the-money put options, investors can go long on US bond with greater "force". Investors who are more optimistic about US Treasuries can choose to sell put options with the same exercise date but an exercise price of 110.

After executing this strategy, before July 5, investors can gain profits from the increase in US Treasury prices between 92.5 and 110, and compared with stocks, investors will get more premium.

When selling put options, you also need to be aware of the risks.

The profit of selling put options is limited to the premium received, but the risk can be great. When the buyer requests to exercise the option, the seller must buy the underlying asset at the strike price. If the price of the underlying asset falls below the strike price, the put option seller may face significant losses.

Happy investings