Born To Sell Seller's Paradise 
Feb 1, 2011 
Ever See A Trillion Dollars?

Want to know what a million dollars worth of $100 bills looks like? How about a billion? Or a trillion?! We have some fun graphics to help you visualize all that money in our How Much Is A Trillion Dollars? blog article.

Covered Bonds

A 'covered bond' is a security backed by a specific pool of mortgages that either have top-notch ratings or are guaranteed by the government. Unlike typical mortgage-backed bonds, banks guarantee investors' principal and retain the debt on their balance sheet.

They are popular in Europe but have been mostly ignored in the U.S. because issuers are unwilling to keep the mortgages on their books because they would then have to meet additional capital reserve requirements. The last covered bond from a U.S. bank was sold in 2007, when Bank of America completed a $2 billion deal. The most recent covered bond deal from a foreign bank (that was priced in US$) was done last week by the National Bank of Canada and yielded 1.659% for 3 years.

Covered Calls On Short Bonds

Well, covered bonds are interesting but what's even more interesting than 1.659% per year is earning time premium by selling covered calls on inverse bond ETFs. By taking on a little bit of risk we can do significantly better than 1.659%/year.

If interest rates rise, regular long bond funds will fall. But, their counterparts, the short (or inverse) bond funds, will rise. If you believe interest rates will rise you can use a strategy of writing covered calls on the inverse bond ETFs. However, many of these instruments are leveraged 2x or 3x (symbols such as TBT, PST, TMV, and TYO) and therefore not recommended for covered calls (unless you are really risk-loving).

The only real choice for an unleveraged inverse bond ETF is TBF which is the ProShares Short 20+ Year Treasury Profile. It will go up in value as the 20-year treasuries go down (which happens when 20-year interest rates increase). The only negative is that the options on TBF have fairly small open interest which means when placing an order to short them you probably will want to use a limit order to split the bid and the ask.

For example, you could buy TBF and sell an in-the-money Feb 45 call between the 75 cent bid and $1 ask. Since the TBF bid-ask spread is much smaller (only a penny or two), you could either leg in by selling the calls first and once filled buy TBF or, better yet, place a combo buy-write order (where you buy TBF and sell a call on it at the same time) for the net debit you are comfortable with. If you used a limit order to sell them for 85 cents (or a buy-write with a net debit of 44.58) and got filled then this would be your trade:

TBF45.43Feb 450.850.9%19.1%

ARIF = Annualized Return If Flat, and is the rate of return you would earn if TBF stays above 45 thru the Feb 19 expiration.


Bottom Line For Bond Holders

If you own bonds then you have rising interest rate risk. You could sell some bonds and put on an equity trade like a TBF buy-write (covered call) to (1) increase your yield, and (2) hedge your long bond position a little. You will be taking on more risk, but you'll also be making more, too: 19%/year instead of 2%/year. The way you lose if if interest rates fall during the time you own your TBF.

TIVO And 3 Other Covered Calls For Feb 19 Expiration

With 3 weeks to go until the February options expire, the top 4 covered calls Born To Sell members have written are (in order of popularity):


(Note: Born To Sell members have access to the full Top 10 Covered Call list, as well as having this list update real-time as members change positions. These are not recommendations, they are merely a reflection of our members' current positions.)

Top 8 Covered Call Watchlist Stocks and ETFs

Currently, the top 8 stocks Born To Sell members are using for their Watchlist are (in order of popularity):


(Note: Born To Sell members have access to the full Top 20 Watchlist, as well as having this list update real-time as members change their watchlists. And, you can have the highest yielding covered calls from your personal watchlist emailed to you after the close each day. Never miss a fat premium from your watchlist again!)

Want More Covered Call Goodness?

Born To Sell is dedicated to only one thing: Making Money With Covered Calls. Our subscribers have access to state-of-the-art covered call screeners and covered call portfolio management tools. For less than the profit of a single trade you could be enjoying recurring monthly income using our tools. Three subscription types to choose from:

Quarterly$149.95 (17% discount)
Annual$499.95 (31% discount)

Plus, all subscriptions begin with a no-obligation 2-week free trial. What are you waiting for? Start collecting premium today!

Happy Trading,

The Born To Sell Team

Follow us: Facebook | Twitter | YouTube