Description

This is for the Nov 15th 2024 calls with a $100 strike price for TLT or the iShares 20+ Year Treasury Bond ETF. 

I buy tail risk hedges when things seem out of whack. My analyst, who is 10x smarter than me is shorting TLT (20+ year Treasury Bond ETF). He's right at the moment. But I throw a few coins at what I deem to be asymmetrical portfolio hedges from time to time. I am pretty sure that I am autistic and I keep losing money. But I turned a 1.5% into an 11 bagger which became a 20% cash position at the Covid bottom and redeployed that money. In short, I lost money for almost a decade and make it back when I needed it the most. It was a great portfolio hedge. But more importantly, it was a great "sanity hedge" and allowed me to go on the offensive. 

The inflation data doesn't look great and seems like it is re-surging. Investors seem more concerned about the US debt situation. We are likely going to be higher for longer. These are things that few anticipated in early 2022. We actually shorted the TLT and other fixed income ETFs in size then. All of this is to say that this isn't my first rodeo. 

I think one should allocate 0.2-0.5% of the portfolio into these Nov 15th, 2024 calls which cost $1.13 at the moment. If the world falls apart, inflation comes down unexpectedly, or Godzilla come out of the ocean and just start killing millions of civilians, investors will likely drive down the yield of the US Treasury. I don't expect this to work. I expect to lose money consistently for the next 5 six months sessions. But when it does, the timing of the Treasuries rallying will likley correspond to your portfolio sinking rapidly and you would appreciate having this "insurance." This could pay out 5x, 10x, 15x, or even 20x in a dire economic scenario. Given where interest rates are, you may also get lucky with a Fed cut while your portfolio broadly rallies. 

I know that this sounds like a second grade book report which I am known to submit to VIC. But even if 1% of the readers benefits, then I have done my job. I fully expect this idea to lose money until it does in a meaningful way when you can really use the proceeds. 

2024 is a year when we are expected to have elevated delivery of apartment units in the Sunbelt. The industry is bringing the most supply to the market. I think it can relief inflationary pressure in the shelter component which is about 4/10 of the overall CPI calculation.  

Valuation - The implied vol is about 16.4% which is reasonable. The 20+ year duration provides a ton of convexity which means that little movements in yield results in huge valuation differences. How much? At a strike of $100 and a call premium of $1.13, you get a 88.5x leverage to the notaionl exposure. This is as close to a black swan CDS as we can for those of us without a ISDA. TLT could trade to $105, $110, or $120. We are not baking in a $150 price scenario. 

Catalyst

Fed cuts interest rates 

Inflation drops 

Sudden recession