If you want to trade US Treasury bonds but don’t have a futures account and want something easier to work with than physical bonds, TLT is an exchange traded fund (ETF) that’s a great product for active traders and long-term investors.  I’ve traded TLT shares and TLT options thousands of times since their introduction in 2002 because of their liquidity and flexibility to create strategies.

TLT’s portfolio is actual US Treasury bonds with an average maturity greater than 20 years.  That means TLT responds to changes in interest rates similar to the way the 30-year Treasury bond does.   It also means that unlike some other ETFs like VXX (the volatility ETF) or USO (the crude oil ETF), TLT does not hold futures.  TLT  doesn’t have to roll the futures from one expiration to the next, and incur a profit or loss on that roll, like VXX and USO do.  The ETFs with portfolios made up of futures can have significant “drag” and tracking error due to the rolls.  TLT doesn’t have that.  

TLT pays a quarterly dividend, which is composed of the cumulative coupon payments of the Treasury bonds in its portfolio.  So, you’ll have to monitor in-the-money call options ahead of the ex-dividend date.

Don’t be put off by what can look like wide bid/ask spreads in TLT options.  Open interest is very high, and if you enter limit orders in between the bid/ask spread you have a good chance of getting filled there.  In my own trading, I get about 40% of my TLT option trades filled at the “mid” or average of the bid/ask prices, and the other 60% .01 away from the mid. That keeps slippage very low.

TLT options have weekly and regular expirations and .5 difference between strike prices.  That combination gives you a lot of flexibility to create trades that are fine-tuned to how you speculate on the direction of bonds, and to keep the risk and capital requirements of those trades low.