This article discusses two exchange-traded funds (ETFs) with different exposures and implied volatilities. The author proposes selling straddles on the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) and buying straddles on the SPDR® Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA). A straddle involves buying both a call and a put option on the same underlying asset with the same strike and expiration date. This strategy benefits from significant price movements that are not reflected in the options’ prices. Selling a straddle is riskier but allows for collecting additional premium. The article highlights the high volatility in bond markets and the low volatility in equities, particularly the Dow Jones Industrial Average. The author suggests that if the long bond suddenly moves significantly, it could impact the Dow Jones. The article also discusses the composition and weighting of the Dow Jones Industrial Average, noting its concentration and lack of diversification across sectors. The author provides payoff profiles for the proposed straddle strategies and suggests implementing the strategy in a specific ratio or using vol-weighting. However, the author acknowledges the uncertainties and challenges of accurately predicting volatility. The article concludes by emphasizing the potential for unexpected market moves and the interconnectedness between bond and equity markets.
