Direction, Instrument, and Duration:
Bearish on Bull US Treasury Leveraged ETFs
Long slightly OTM/ITM Puts on TYD, also consider selling deep ITM Calls.
Justification of Thesis and Position:
1) Treasury prices (yields) do not follow Black Sholes. They move in discontinuous steps with FED action and market panic. This has implications for options pricing.
2) Leveraged ETFs lose value over-time regardless of the direction of their tracking index due to volatility decay.
Simple question: Under what circumstances does the 3x Bull ETF on US Treasuries (TYD) not lose ?
Answer:
In order for TYD to not lose value over time, yields must steadily move towards negative infinity forever. Rates going steadily to negative infinity is highly unlikely.
For completeness, here are the other possible outcomes:
If yields move sideways- TYD loses to decay.
If yields spike up - TYD has a discontinuous gap down, as we just witnessed this past month after the BTC melt up.
Max Risk: Your premium.
Would love some feedback!
You highlight the deficiency inherent in an ETF rolling futures. It is well known to short something like SQQQ due to constant decay if bullish QQQ rather than to go long TQQQ due to exactly what you highlighted.
Right, the mechanics are very well known, however, the trade has more to do with options pricing of Treasury LETFs given this mechanic. Maybe I wasn't clear about what is new.
TQQQ/SQQQ/SPXU/NUGT, etc options are overpriced. The outcomes for equities are highly uncertain.
ITM Puts on TYD were priced cheaply and seemingly based on Black Sholes.
i don't think Black Sholes makes sense for thinking about options on Treasury prices, but I have seen an ITM options be only slightly more expensive than the OTM. Just looking for a sanity check on that.
Really? I said rates would break out for nearly 6 weeks and I couldn't get a bid from anyone on here :) Which way are yields going? What expiry is on those options?
New to the Exchange, have been preaching treasuries (and the bond market at large) meltdown since '18.
I bought ITM (63 strike) Puts on TYD in Oct for around 2.00 a contract a year out. Notice how TYD discontinuously gapped down to 59 in a week. That low premium alone was absolutely insane to me given the fact that the instrument decays and yields were at freaking 0 already!
Options were priced as if yields move like stock prices, but we know for a fact that's not the case. So given the relative odds of the three outcomes for yields, TYD options strike me as mispriced. I am not an options theory expert, so mostly posting for someone with a sexier math background than me to weight in.