Established Covered Calls Position in the iShares 20+ Year Treasury Bond ETF

Today a short-term in-the-money Covered Calls position was established in the iShares 20+ Year Treasury Bond ETF (ticker TLT) at the December 8th, 2023 options expiration date and at the $89.00 strike price.  Two hundred TLT shares were purchased at $90.05 per share and two December 8th, 2023 $89.00 Calls were sold at $1.73 per share. The corresponding potential time value profit is $.68 per share [$1.73 Call options premium - ($89.00 strike price - $90.05 ETF purchase price)].  The Delta was 64.2 when this position was established which approximates the probability that the Calls will be in-the-money on the options expiration date.  In addition to the potential time value profit of $.68 per share, there is an upcoming monthly ex-distribution on December 1st which is $.2889 per share and which is prior to the December 8th options expiration date.  

As you know, I normally prefer to establish Covered Calls using individual stocks rather than broader indices such as ETFs.  The reasons for this is described in my prior post entitled "Exploiting Our Covered Calls Investing "Edges"' (see items #2 and #3 in the article here).  This TLT ETF contains U.S. Government Treasury Bonds of 20-and-more years duration and its current 30-day yield is 5.05%.  Many investors are satisfied with buying-and-holding T-Bonds, but we Covered Calls investors know we can do much better than a 5.05% return via this long-term Treasury Bond ETF by using our Covered Calls investing approach.  This is true not only for our usual Covered Calls positions using stocks as the underlying equity, but this TLT Covered Calls position demonstrates that it is also true for Covered Calls with this conservative Treasury Bond ETF (i.e. TLT), whose potential annualized-return-on-investment (aroi) result of +28.1% at the options expiration date, as detailed below, greatly exceeds the current 5.05% yield from simply owning TLT shares. 

As we know, bond prices move inversely (i.e opposite) to bond yields.  Long-term treasury bond yields seem to have peaked about 5 weeks ago and have begun to slowly decline -- so the TLT price has begun to reverse from its long-term decline and has recently slowly increased.  If this trend continues (or simply doesn't quickly reverse), this position will achieve the return-on-investment returns detailed below. 

Two potential return-on-investment results are: (a) +0.8% absolute return (equivalent to +39.7% annualized return-on-investment for the next 7 days) if TLT is assigned early on the day prior to the December 1st ex-distribution date; or (b) +1.1% absolute return (equivalent to +28.4% annualized return-on-investment for the next 14 days) if it is assigned at market close on the December 8th, 2023 options expiration date.  

iShares 20+ Year Treasury Bond ETF (TLT) -- New Covered Calls Position 

The buy/write transaction was as follows:
11/24/2023 Bought 200 iShares 20+ Year Treasury Bond ETF shares at $90.05.

11/24/2023 Sold 2 TLT December 8th, 2023 $89.00 Call options @ $1.73 per share.
9/1/2023 Ex-distribution of $.2889 per share.

The overall performance results (including commissions) if TLT remains in-the-money at options expiration would be as follows:
Covered Calls Net Investment: $17,665.34
= ($90.05 - $1.73) * 200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$344.66
= ($1.73 * 200 shares) - $1.34 commission

(b) Distribution Income [If TLT is assigned early next Thursday which is the last business day prior to the December 1st ex-distribution date: +$0.00
(b) Distribution Income [If TLT price is in-the-money (i.e. above the $89.00 strike price) and the position is assigned (i.e. closed out) at options expiration on December 8th]: +$56.00

= $.2889 distribution per share x 200 TLT shares

(c) Capital Appreciation (If TLT is assigned at the $89.00 strike price either early or on the 12/8/2023 options expiration date): -$210.00

= ($89.00 strike price - $90.05 purchase price) * 200 shares

Total Net Profit:

1.  If TLT shares are assigned early on the day prior to the ex-distribution date: +$134.66
     = (+$344.66 options income +$0.00 distribution income -$210.00 capital appreciation)

2.  If TLT share price is in-the-money (i.e. above the $89.00 strike price) at options expiration: +$192.44
= (+$344.66 options income +$57.78 distribution income -$210.00 capital appreciation)

Potential Absolute Return-on-Investment: 

1. If TLT shares are assigned early on the day prior to the ex-distribution date: +0.8%

    = +$134.66/$17,665.34

2. If TLT shares are above the $89.00 strike price at the December 8th, 2023 options expiration): +1.1%

    = +$192.44/$17,665.34

Potential Annualized Return-on-Investment: 

1. If TLT shares are assigned early on the day prior to the ex-distribution date: +39.7% 

    = (+$134.66/$17,665.34) * (365/7 days)

2. If TLT shares are above the $89.00 strike price at the December 8th, 2023 options expiration): +28.4%

    = (+$192.44/$17,665.34) * (365/14 days)

Either outcome provides an attractive return-on-investment result for this iShares 20+ Year Treasury Bond ETF investment.  These returns will be achieved as long as the price is above the $89.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $88.0311 ($90.05 -$1.73 -$.2889) provides 2.2% downside protection below today's stock purchase price.

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy.  As shown below, eight of the nine criteria are achieved for this iShares 20+ Year Treasury Bond ETF Covered Calls position.

Please email if you have any comments or questions related to this post or to anything related to the Covered Calls investing strategy.

Regards and Godspeed,
Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net