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

Today an in-the-money Covered Calls position was established in the iShares 20+ Year Treasury Bond ETF (ticker TLT) at the August 11th, 2023 options expiration date and at the $99.00 strike price.  Three hundred TLT shares were purchased at $100.71 per share and three August 11th, 2023 $99.00 Calls were sold at $2.18 per share. The corresponding potential time value profit is $.47 per share [$2.18 Call options premium - ($99.00 strike price - $100.71 ETF purchase price)].  The Delta was 70.5 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 $.47 per share, there is an upcoming monthly ex-distribution on August 1st which is not pre-announced but which I estimate at $.27 per share and which is prior to the August 11th options expiration date.  

As you know, normally I 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 only 3.83%.  Many investors are satisfied with buying-and-holding T-Bonds, but we Covered Calls investors know we can do much better than a 3.83% 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 even true with Covered Calls with this conservative Treasury Bond ETF (i.e. TLT), whose potential annualized-return-on-investment (aroi) result of +18.2% at the options expiration date, as detailed below, greatly exceeds the current 3.83% yield from simply owning TLT shares.  

Two potential return-on-investment results are: (a) +0.5% absolute return (equivalent to +34.1% annualized return-on-investment for the next 5 days) if TLT is assigned early on the day prior to the August 1st ex-distribution date; or (b) +0.7% absolute return (equivalent to +18.1% annualized return-on-investment for the next 15 days) if it is assigned at market close on the August 11th, 2023 options expiration date.  

While I do not intend to change from my approach of almost always establishing my Covered Calls positions using individual stocks as the underlying equity, I admit that I am finding this experiment in establishing a Covered Calls position using the TLT Bond ETF to be a good and conservative alternative to simply buying Treasury Bonds.

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

The buy/write transaction was as follows:
7/27/2023 Bought 300 iShares 20+ Year Treasury Bond ETF shares at $100.71.

7/27/2023 Sold 3 TLT August 11th, 2023 $99.00 Call options @ $2.18 per share.
8/1/2023 Ex-distribution of $.275282 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: $29,561.01
= ($100.71 - $2.18) * 300 shares + $2.01 commission

Net Profit:
(a) Options Income: +$651.99
= ($2.18 * 300 shares) - $2.01 commission

(b) Distribution Income [If TLT is assigned early on next Monday which is the last business day prior to the August 1st ex-distribution date: +$0.00
(b) Distribution Income [If TLT price is in-the-money (i.e. above the $99.00 strike price) and the position is assigned (i.e. closed out) at options expiration on August 11th]: +$82.5846

= $.275282 distribution per share x 300 TLT shares

(c) Capital Appreciation (If TLT is assigned at the $99.00 strike price either early or on the 8/11/2023 options expiration date): -$513.00

= ($99.00 strike price - $100.71 purchase price) * 300 shares

Total Net Profit:

1.  If TLT shares are assigned early on the day prior to the ex-distribution date: +$138.99
     = (+$651.99 options income +$0.00 distribution income -$513.00 capital appreciation)

2.  If TLT share price is in-of-the-money (i.e. above the $99.00 strike price) at options expiration: +$221.5746
= (+$651.99 options income +$82.5846 distribution income -$513.00 capital appreciation)

Potential Absolute Return-on-Investment: 

1. If TLT shares are assigned early on the day prior to the ex-distribution date: +0.5%

    = +$138.99/$29,561.01

2. If TLT shares are above the $99.00 strike price at the August 11th, 2023 options expiration): +0.7%

    = +$221.5746/$29,561.01

Potential Annualized Return-on-Investment: 

1. If TLT shares are assigned early on the day prior to the ex-distribution date: +34.3% 

    = (+$138.99/$29,561.01) * (365/5 days)

2. If TLT shares are above the $99.00 strike price at the August 11th, 2023 options expiration): +18.2%

    = (+$221.5746/$29,561.01) * (365/15 days)

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