HIMU

nat-n-emore

Another option is Municipal Bonds. Get them in an ETF like HIMU or FTMH to enjoy Federal Tax-Free income while putting your money behind things we all actually need, like bridges and hospitals.

MerryRunaround

I understand your logic about not leaking theta. It makes sense. However, it seems your plan (scenario A) is to hold HIMU all the way through a crisis cycle and you will collect dividends regardless of what happens to NAV. If that happens you will have an opportunity to profit from your long put. That's great but is that really a "hedge" if you continue to hold the shares? Maybe it is just semantics, but that sounds more like simply shorting the bond market, which anyone could do whether or not they are holding HIMU.

Dense_Ostrich_6077

Sure. I see the point. Let me add some context and plan for this trade so I can get some constructure criticism here. I don't intend to hold the put to expiry. There is little theta on this option for the next 16 months, so 50% risk premium I am paying is concentrated in the last 6 months of the put. The thesis here with the hedge is that the US is slowly jogging towards a sovereign debt crisis. Won't happen tomorrow but the long end of the yield curve is going to go up - it will probably be a "spikey" event sometime in the next 16 months that catalyzes an abrupt change in sentiment. (See yesterday for instance or if the next Fed chain continues a plan to cut rates with advancing inflation) The plan is that I'll keep this contract open for next 16 months Scenario A) TLT continues to slide or a negative news catalyst occurs , this put will swing deeper ITM on that event. The gain in the option will offset any losses in HIMU at that point. If that happens, the USG will be forced to implement measures to satisfy the bond market (Fiscal austerity, VAT implementation, etc), at that point TLT will begin to rebound. I'll close this put for a profit, HIMU will retrace (hopefully) to closer to my purchase price and I have protected my principal while still netting the tax free dividend from the muni. Scenario B) TLT does nothing over the next 16 months, HIMU stays close to the price I paid and I sell the put back for a loss on or around May 2027. The expected price of the contract on that date assuming no change in TLY from today is $600. So I paid about $200 in insurance costs on $20k worth of capital. (1%). Yeah that eats into my return, but I am still netting \~4%. Finally the small loss on this option offsets any gains I have elsewhere in my taxable income generating portion of my portfolio. So even this insurance offers value to me elsewhere. So open to feedback on this and if I am thinking about it the right way.

Dense_Ostrich_6077

I have $20k in HIMU, a junk muni ETF. It yields about 5% and income is free from federal tax.so $1000 / yr free and clear of any USG taxes.  The biggest single risk with that position is interest rate sensitivity. When yield climbs the value of the bonds will fall and ETF price will follow. because of the very real risk that the long end of the yield curve here in the US is going to explode in next 2 years I purchased ATM TLT put for $800 (LEAP) expiring in Jan 2028. TLT price is tightly correlated with HIMU. This I am paying about $400 a year in options premiums as insurance on my $20k principle.  A couple things: I am surrendering half the yield in name of insurance. Yes. But I'm largely hedged and delta neutral as HIMU price changes. 

Dense_Ostrich_6077

I have a portion of capital at work in an income generation account. I will occasionally write calls or open CSPs on these  HIMU - 30% allocation (Muni fund - no options chain) SNSXX - 30% allocation (I use this money market fund as collateral for CSPs) F - 10% allocation ARCC - 10% allocation  SVOL 5% allocation (I actively hedge this position to protect against NAV erosion) SCHD 10% allocation - modest capital appreciation IBIT 5% yes I know. :) Vol.premium usually attractive.