Fixed Income Strategies

Strategy1: Sell long term covered call on TLT. Instead of Buying 1 Year CD, I propose following strategy:

TLT had a bad year after huge runup in last 5 years, its recovering but hovering between $90-$100.
For TLT, I studied 6month rolling returns, between Oct-Jan highest average perf over last 8 years, peaking in Dec. So it might be good to sell put calls expiring in December. Or sell Jan puts & close them in December.

Price 11/25/09 = 96.04
to reduce risk a lot, I propose selling $90 put for Jan 2011. For 13months, you get 7.9 back. Net returns are way better than 1 year CD (on black friday I am getting 2% promotional CD).

	Per Unit	Net cost
price	96.04	$ 9,604.00
option 90	7.9	$ 790.00
dividend	3.6	$ 360.00
1% price variance	0.9604	$ 96.04
Trading cost	3	$ 30.00
net cost		$ 8,580.04
Sale	90	$ 9,020.00
net return		5.13%

Strategy #2: Sell naked Put & lock in a CD for same maturity time
For same example above, naked put of $90 for Jan2011 can fetch $7.1 - trading costs.
Risk wise, this strategy looks similar to #1 only down side is that if price falls a lot during the year, you might get assigned the option & since your money is locked in CD, you have to break the CD & returns will reduce to 7.25% (you have to give back $180 you'll make).

	Per Unit	Net cost
price	90	$ 9,000.00
Naked option 90	7.1	$ 710.00
variance	1%	$ 702.90
trading costs		$50
cd return	2%	$ 180.00
Net return		$ 832.90
% return		9.25%