How to Boost Your Yield on U.S. Treasury Securities

Instead of buying treasury securities directly from the Treasury or through a broker, buy an exchange traded fund (ETF) called 20+ Year Treasury Bond ETF (symbol TLT).  It trades exactly like a stock and has at least 95% of its assets in U.S. government obligations.

The way to boost your return is by selling a call option against your position.  The buyer of the call option (each call option represents 100 shares) has the right (not the obligation) to purchase your 100 shares of TLT at a certain price (strike price) within a certain time limit.  For that right the call buyer will pay you cash (the premium) directly into your account.  This is yours to keep no matter what.

Let’s go through an example.  Recently, TLT closed at $89.90 per share or $8,990 per 100 shares.  You can sell a call option for someone to buy your 100 shares between now and the third Friday in March (approx. 3 months) at $92.00 per share.  For that right the buyer will pay you $130.00.  This $130.00 is yours to keep.

Assuming prices remain constant (which they will not), what is your annual rate-of-return?  You earned $130.00 in three months or $520.00 on an annual basis.  Divide $520.00 by the cost of your 100 shares of TLT ($8,990) and you get an annual return of 5.70%.  In addition, you earn 3.90% annual interest on your TLT shares.  This gives you a total return of 9.60%. Not bad, but there are risks.

RISKS:  There is no such thing as a riskless investment.  In this case if interest rates decrease, the price of TLT can easily go above they $92 strike price.  Your 100 shares will then be called away.  In this event, you have made your money and then some, so let it be called away.

The real risk to you is that long-term interest rates rise.  If this happens, the price of your 100 shares of TLT will fall and maybe substantially.  The $130.00 premium you received by selling a call option can offset part of the price decline, but probably not all of it.  You can still be left with a negative return. Your $92 call option will expire worthless and you can then sell another three or six month call option.  The premium you receive will depend on market conditions and the price of TLT. 

FINAL NOTE:  You should only employ this investment strategy if you feel it is suitable for your investment objectives.  In the calculations above, I omitted commission costs.  If you wish to employ this strategy, do not use a full-service brokerage house.  Their commissions will decimate your rate-of-return.  You should use a discount broker and do it online.

<a href=”http://www.blogs-collection.com/” title=”blogs directory” target=”_blank”>Blogs Directory</a>