We’ve been using a 114.28 correction target before staking out a new, bullish position using out-of-the-money calendar spreads. Accordingly, I’ll recommend buying the November 22 117 / September 20 117 calendar spread 16 times if and when the target is closely approached. The spread settled around 1.04 on Wednesday, but it will sell for significantly less if TLT falls by the implied 70 cents. Your bid should be about midway between the spread bid and offer, and you should start to monitor the spread when the stock (ETF) has fallen into the range 114.38-114.18.
We’ll have perhaps six opportunities to roll the spread forward by shorting successive weekly expirations against Nov 22 calls, and even if TLT goes nowhere, that should reduce our exposure by about 0.12-0.20 per week. Of course, if TLT resumes its upward trek from the targeted low, the premium we’ll receive for the weekly roll could exceed 0.20. Ultimately, that would give us 16 Nov 22s for an effective credit over and above what the option is selling for when it expires. _______ UPDATE (Sep 15, 12:26 a.m. EDT): I see that the ETF opened on a huge gap beneath my target — did so when I was in a mountainous area of Colorado for a long weekend, far from computers, cell phones and a broadband network. The spread opened at 0.89 and settled at 0.78, and it could easily have been bought intraday for around 0.84, but I’ll wait to I hear from subscribers before I establish tracking guidance. Given the wild-and-whacky opening, it’s possible none of you did the trade. Regardless, it would be a good buy this morning for around 0.78., subject to a ‘delta adjustment’ of one cent for each 5-cent move up or down in the underlying. _______ UPDATE (Sep 16, 11:43 p.m.): We’ve backed away for the time being, pending whatever momentous announcement is coming from the Fed on Wednesday.