Wednesday, September 09, 2009

SHY, TLT & FAS Pairs

Here are 2 ideas involving essentially the same concept. . . trading treasury bonds against the financials triple ETF.
TLT is the I-Shares 20 year treasuries ETF and SHY is the I-Shares 1-3 year treasuries ETF.
TLT trades about 3.5M shares a day, SHY about 800K. Both have options although the open interest and daily volume in SHY options (often zero) precludes using them in any realistic spread strategy.
SHY does produce an overall better net return over our lookback period and both optimize on a 5 day cycle (see Lookback period (N-Days) but IMHO TLT is probably the lower risk situation.
FAS trades around 30M shares a day (and a bit volatile) and the option open interest and daily volume is robust across a 10 point strike spread and more. Keep in mind FAS is a triple and as a result the bid/ask spread on most of the options is not pennies but typically quarters, so that risk has be to considered when playing a pairs option spread on the underlying.

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