I have no idea what you are talking about Here's a little help: Rather than keep cash in my account I automatically move almost all cash into treasuries. This was a good plan back when treasuries were paying near 4%, is less a good idea now that long term treasuries are paying in the range of 2-3%... but it is still better than cash. (and I bought my treasury hedge a few years ago) What you are getting for treasuries now depends on when you bought them... they used to be cheaper but are relatively high now and thus have less yield. http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ I use mostly 30 year treasuries which Bloomberg says is yielding 3.15%. ( a number I'm skeptical of). TLT is not a stock. It is an ETF that tracks a bond index and I along with many other people use it as a proxy of what my 30 year treasuries are yielding. It gets a little less than the 30 year treasuries... but it's approximate. TLT: The investment seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays U.S. 20+ Year Treasury Bond Index. The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of 20 or more years. As of April 30, 2012, there were 18 issues in the underlying index. I maintain a 100K trading portfolio that I keep at about 2/3 treasuries. The remaining 1/3 I use to margin my options trades. When I need cash I convert treasuries into cash. Usually when I have excess cash I buy more treasuries... but not if treasuries are expensive. If they are expensive I'll hold the cash until they are cheaper. (this is not quite correct but it will do). e.g. recently I put some cash into WMT spreads because treasuries are too high) So when you say to me how much 'treasury commitment' do I need to provide for my spreads I compute that from the current status of TLT. For all intents and purposes TLT = Treasuries. Remember TLT is not a stock it is a US Treasury Bond Index ETF. BTW when you hold TLT you get paid your interest every month: http://finance.yahoo.com/q/hp?s=TLT+Historical+Prices If you remember I told you that rather than invest in naked short puts I get a higher yield by going to the spread and having enough cash to buy the stock if put... but that I hold that cash in treasuries because, unlike margin, treasuries pay me interest. The above calculations show how that works. I won't go into treasury spreads because I am afraid that is going too deep. Suffice it to say that I can, instead of buying treasuries, do a treasury spread that yields a much higher return than treasuries themselves and are just as safe... or even more safe. SO: If I do an option spread and I get put on the short option I am covered either with cash or with treasuries which are a proxy for cash that earns interest. Another BTW: there used to be brokers that would take treasuries to count toward your margin... but I don't think that is true any more. Since I have a cash account it doesn't matter to me.
<<< If I do an option spread and I get put on the short option I am covered either with cash or with treasuries which are a proxy for cash that earns interest. >>> It's only a proxy for cash if it is not dropping in value. Meanwhile, TLT has dropped 15 points over the past 7 months. For the puny annual yield it's offering, I think cash is a better place for the cash.
It sounds like OldNemesis is a credit spreader who is not levered 9:1. A rare animal, perhaps the only one in the world. I hope he can find someone to mate with or he'll be the end of the line, just like Lonesome George. http://en.wikipedia.org/wiki/Lonesome_George
If he is truely not on the typical 9 - 10 times leverage, like most credit spread traders are, then I give him "credit" for more wisely managing his money than most.
It's only a proxy for cash if it is not dropping in value. Meanwhile, TLT has dropped 15 points over the past 7 months. For the tiny annual yield it's offering, I think cash is a better place for the cash You have to understand the context in which treasuries are trading and how they are used. http://finance.yahoo.com/q/bc?s=TLT&t=5y&l=on&z=l&q=l&c= Treauries have run up very high in the past year and a half because of the high level of fear in the market. TLT (and treasuries) are now pulling back a little from that... thus raising their yield. This is actually a good thing and signals a decrease in fear in the market. When TLT and Treasuries were very high we were looking into the face of DOOM. It's only bad for you if you were scared and you bought treasuries near the top and now you are losing capital. TLT is an anti-stock: http://finance.yahoo.com/q/bc?s=TLT&t=5d&l=on&z=l&q=l&c=^GSPC http://finance.yahoo.com/q/bc?s=TLT&t=5y&l=on&z=l&q=l&c=^GSPC and typically runs opposite to the stock market. The recent aberration (from which they are retreating) is due to the high level of fear in institutions (and foreign treasuries for that matter) that we would have another 2008... which has raised the price of treasuries and TLT. Think for example of banks that had money invested in Greek bonds. They have been moving that money to.... U.S. Treasuries, thus raising the price of treasuries. The decline in price of treasuries is (perhaps) a signal of the normalization of trade. As I said above: the treasuries I hold were acquired a while ago, and I have avoided acquireing more while there is a 'treasury bubble'. Treasuries themselves are auctioned off perodically and you will see in the news when those auctions occur. Retail investors then buy them on an open market from people who bought them at the auctions. You are thinking of TLT as if it were a stock. It is not. It is an anti-stock.
However, given that the degree of potential leverage a spread trader is on, is dependant on the strike(s) selection(s), I suspect he is still on a sig degree of leverage, but not aware of it. However, given that he is only using 1/3 of his cash for spreads, I suspect, he is probably on closer to 3 times leverage, vs the more usual 9 - 10 times. Bottom line,.... unless a spread traders stocks are in the $15 or lower area, he is on leverage. The higher the strikes the higher the leverage.... even if only using 1/3 your cash. The 2/3 cash set aside, merely gives you the opportunity to "buy more of your stocks", than if you were fully invested in spreads. But you still can't buy them all... unless they are all low priced strikes. It all boils down to the strike selection.
If you are using TLT as a potential source of income, to purchase a stock from a spread investment, and the value you receive from TLT is dependent of where it is currently trading, at the time you want to liquidate it,.... then it is really no different than investing in any other dividend paying stock. The only difference is, this so-called "anti-stock" pays you the puny dividends monthly vs quarterly. Again, this anti-stock is down 15 points over the past 7 months. Put in $100,000 7 months ago.... take out $85,000 today (plus dividends.)
I don't know how many times I have to say it before it sinks in: The recent rise in the price of treasuries is an aberation and is a result of the high level of fear in the market... plus the Bernanke low interest rate decree. For decades the price of treasuries and TLT was very stable: http://finance.yahoo.com/q/bc?s=TLT&t=my&l=on&z=l&q=l&c= and yielded between 4% and 5% in interest. When I bought my treasuries TLT would have been running around $85 to $90. If you bought your treasuries for income "7 months ago" you you are very unhappy right now. We have been in a bubble regarding treasury prices and if you bought "7 months ago' you were buying at what may be the top of that bubble. Many people may have done so out of fear that the stock market and foreign soverign debt was unsafe. From today's perspective that looks like a mistake. But the final chapter has yet to be written. In fact we may yet see defaults on soverign debt and a collapse of the stock market which could double the price of US Treasuries. What will be the price of TLT next year??? Do you know?? You are talking as a short term trader not as an investor. For a six months trade certainy TLT was not so good. http://finance.yahoo.com/q/bc?s=TLT&t=6m&l=on&z=l&q=l&c= For the previous six months it did you well: http://finance.yahoo.com/q/bc?s=TLT&t=1y&l=on&z=l&q=l&c= And for many years before that it was very stable. http://finance.yahoo.com/q/bc?s=TLT&t=my&l=on&z=l&q=l&c= People who are using Treasuries are not doing 3 and six month investments. I have held my treasuries almost 10 years now. If I had a short term view of that investment I would have been in and out of the market 15 times. That's not what I do. I use that investment as security for my short term trades yes, but I do not go in and out with treasuries with each trade. The money is there ready to use if needed, for this trade, the next trade and the trade after that. As for my return I am getting about 4.2% on my treasuries. You are projecting your 'vision' where it does not apply.
Put_Master, It appears that you are not opening new positions lately. Is this because of the bull market and you don't see good opportunities? If you are not opening new trades, are you in cash? I ask because I generally agree with your trading philosophy and intend to enter the trades you post (unless its on AAPL *smile*). Thanks.