To TBT, or Not to TLT? Position Size is the Question.
Treasuries have recently run higher than ever before ( feel free to fact check that, that’s what I’ve heard). I took a stab at TBT about 3 weeks ago, and was stopped out. I was very very early. I am going to set an order on Monday in my discretionary account to purchase TBT again.
I had considered shorting TLT.ﾃつHowever, after calculating position sizing and stops, I believe TBT offers a betterﾃつopportunity.ﾃつNot to mention, there may not be shares of TLT available to short.
Let me explain why I think going long TBT is a better trade.
In order to determine a position size, the amount to be risked must be determined. For our purposes, let’s say we’ll risk 1K, which would be 1% of a 100K account.
To determine the stop, I like to use ATR(10). As the above chart of TBTﾃつshows, ATR is 2.41. We’ll take a multiple of that figure. I like 1.25*ATR. Here is the calculation: 1.25*2.41=3.01
Therefore, our stop will be $3.01 beneath the entry.
To get our position size, we divide our amount risked (1K) by our stop. $1,000/$3.01 = 332 shares of TBTﾃつto be purchased. Note: Our stop level is conveniently beneath Friday’s low, an added bonus!
Now lets look at position sizing for shorting TLT
1.25*2.36 = $2.95ﾃつﾃつ Remember that was 1.25*ATR(10).
Thus, our stop will be $2.95 above the entry.
$1,000 / $2.95 = 339 shares.
Thus, shorting TLT will allow for a slightly larger position size (339 vs. 332), with the same risk as going long TBT.
Let’s take it one step furtherﾃつand complete some volatility analysis of each ETF.
To calculate volatility and normalize it across both instruments, we’ll divide ATR(10) by Friday’s close and then turn it into a percentage.
TBT (2.41/44.10)*100 = 5.46%
TLT (2.36/110.48)*100 = 2.14%
TBT is twice asﾃつvolatile as TLT. This should be no surprise since it is a double-short ETF. If the trade gets the expected move to the upside, then TBTﾃつwill be the best choice as the position sizing is similar to TLT butﾃつon any run up, it mayﾃつmove twice asﾃつfar. Basically, the risk is the same, but the payoff may be double.
Caveat: Any significantﾃつgap up in TBTﾃつon Mondayﾃつmay throwﾃつoffﾃつthe calculations.
I got stopped out of TBT as well and fully believe that long term it will be an ATM, but due to certain FED chairman comments and actions I will wait until FED rates drop further and the FED shows some signs of slowing their relentless campaign to take longer term rates lower and keep them there.
I think I may have been a few months early.
You can also go long PST
This was good math for novice me - but aren’t bond funds the post spiked punch at the bar? Hourly only had 3 turnaround bars after smooth sailing to this point
TBT is OK for a quick trade based on technicals only, but I wouldn’t want to own any of these etf’s on steroids for the long haul. Just to many perverse risks involved.
http://www.geldpress.com/2009/05/proshares-tbt-risk/