Sold 5 TLT Naked Calls

Those of you who have been reading my blog for a while know that I’m a fan of selling calls on TLT. The basis for my attraction to the bond ETF is that it’s volatile and tends to follow patterns. Most importantly, when it does reach new highs, it reverses away from these price spikes within weeks usually. Selling naked calls on any stock or ETF is risky, but I recognize these risks (especially since I’ve made mistakes with my approach in the past) and have learned to manage the trade better when I’m wrong on my timing.

While TLT was trading at $143.09, I sold five TLT April $149 naked calls for $1.15 each and received $573.66 after paying $1.34 in commission. I’ve sold two and three contracts on my last couple of TLT option trades, but raised my count to five this time because I have so little invested right now. I figured I could accept more risk on this trade since I have the cash available to cover the short if I’m assigned. Usually, I sell TLT calls on potential margin. Since I’m still gun shy about stock prices in the near-term, I figured this was my next best trade to make.

Late last August, TLT made it as high as $148.90 intraday before rolling over. Since I’ve been burned in the past relying on previous highs to hold resistance, I opted to set the strike a few cents above the previous high and allow the premiums to be my cushion to ease any short-term losses.

Yesterday would’ve been a better day to sell these calls when TLT was more than a dollar higher and the VIX was 10% higher, but I wanted to see how today’s price action was before I jumped in. Adding to my conviction today, I saw that the Williams %R indicator reached “0” on the 14, 28, and 56-day periods. When Williams %R is above “-20”, it is considered to be overbought, but stocks and ETFs can remain overbought for months at a time.

The better sell signal is when Williams %R reaches its absolute extreme reading of “0”. That tends to signal the momentum has reached a peak and the equity should move lower within a couple of days. It’s not a guarantee, but works a lot more often than not. If this is one of those times it doesn’t work, I’ll hold steady until I decide to sell another lot of five naked calls at a higher strike. If assigned, I could make a decent gain holding the shares short as TLT returns to its more regular recent price range between $135 and $140.