I'm stuck with some illiquid real estate investments that may not have been the best idea. My biggest concern about these is their vulnerability to an interest rate shock. They are long-duration assets, and some rely on borrowing without a long-term fixed rate. I also have a lot of exposure to the stock market, which has some degree of interest rate sensitivity.
I don't want to derail the discussion by going into specifics, but I'm concerned for a few reasons that long-term interest rates could go up significantly over the next few years. I don't think of this as a high-probability event, but I think there are plausible scenarios that are worth considering.
This concern made me wonder about hedging interest rate risk. One idea I had was to buy put options on TLT (iShares 20+ Year Treasury Bond ETF). TLT's current NAV is $88.31/sh. During the post-pandemic rise in interest rates, it decreased from $170/sh to a low of $83/sh.
I can buy a January 2027 put option on TLT with a $50 strike price for $0.17/sh. This option would probably expire worthless, but would likely pay off in relatively extreme scenarios where long-term rates rise by at least another few percent. With this strategy, hedging $100k of long-duration assets for two years would cost $193. There are various permutations on the same approach, like buying January 2026 puts struck at $60 instead for $0.18/sh, or using a mix of expiration dates and strike prices for a smoother payoff curve.
This feels like relatively cheap insurance that would help me SWAN. I'm curious for any thoughts on this approach to interest rate hedging, and whether there may be even better choices, like futures, options on futures, or ETFs engineered for betting on rates.
I don't want to derail the discussion by going into specifics, but I'm concerned for a few reasons that long-term interest rates could go up significantly over the next few years. I don't think of this as a high-probability event, but I think there are plausible scenarios that are worth considering.
This concern made me wonder about hedging interest rate risk. One idea I had was to buy put options on TLT (iShares 20+ Year Treasury Bond ETF). TLT's current NAV is $88.31/sh. During the post-pandemic rise in interest rates, it decreased from $170/sh to a low of $83/sh.
I can buy a January 2027 put option on TLT with a $50 strike price for $0.17/sh. This option would probably expire worthless, but would likely pay off in relatively extreme scenarios where long-term rates rise by at least another few percent. With this strategy, hedging $100k of long-duration assets for two years would cost $193. There are various permutations on the same approach, like buying January 2026 puts struck at $60 instead for $0.18/sh, or using a mix of expiration dates and strike prices for a smoother payoff curve.
This feels like relatively cheap insurance that would help me SWAN. I'm curious for any thoughts on this approach to interest rate hedging, and whether there may be even better choices, like futures, options on futures, or ETFs engineered for betting on rates.
Statistics: Posted by Startled Cat — Mon Dec 23, 2024 10:46 am — Replies 4 — Views 188