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!