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September 9th, 2011 by

Forward Options In TLT

What is the Federal Reserve going to do? Are they going to buy longer dated Treasuries and sell shorter dates ones? This is appearing more and more likely, and we should see in the next couple of months how this all plays out. The iShares Barclays 20+ Year Treasury Bond ETF, the TLT, is a good way to get into those longer dated treasuries, especially if you believe that 30-year rates are going down.

You might think that with all this speculation about Fed buying, people would be buying calls left and right. With the stock at $112.40, I took at the $112 strike to see what the options look like. For the October strike, the calls and puts are trading at about the same price. However, as you go further out, the puts are more expensive than the same strike calls. For instance, the November expiration puts will cost you $4.70 now, but the calls are only fetching $4.35, and that’s even with the stock 40 cents above the strike. If you go out to March of 2011, the calls cost $6.45 and the puts cost $7.85.

This all could be due to volatility, or maybe not. I’m looking for a reason why the puts seem to be a bit more expensive than their call counterparts. Maybe the Fed will only buy 10-year Treasuries and not buy the 30s. Seems to me that people think there is a better chance of 30-year yields rising over the next 6 months than falling.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Forward Options In TLT

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