TLT: Have Treasury Bonds Hit a Top?

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Nailing a top in the Treasury bond market has been notoriously difficult. Participants have been expecting rising interest rates — and falling bond prices — for seemingly ever.

isharesAnd yet, the much-anticipated rising rate regime has remained as yet a fantasy.

Adding further trickery to an already difficult task has been the number of fake-outs we’ve seen. Each time it appears the deathly descent in bond prices has commenced, buyers inevitably rush back in and prop prices right back up.

For myself, high-probability option strategies have been the most effective when attempting to profit from falling bond prices. That way, I have a wide margin for error just in case whatever bearish pattern I’ve discovered in bonds ends up failing.

I’ll suggest just such a trade idea momentarily, but first let’s get to the whole reason for today’s missive.

The recent behavior of Wall Street’s favorite bond proxy — the iShares Barclays 20+ Yr Treasury Bond (ETF) (NYSEARCA:TLT) — looks quite attractive for another bearish bet.

The recent TLT rally is fizzling as the minor double top around $132.80 will attest. What’s more, because of weakness in the bond ETF over the past few months, the 50-day moving average is declining for the first time in more than a year.

TLT
Source: OptionsAnalytix

It’s been awhile since we’ve seen this type of price deterioration in TLT. Whether this is the start of a larger downturn or not remains to be seen. Regardless, the current level of the TLT ETF remains as good a perch as any to initiate a bearish play.

Play it Safe With TLT Call Spreads

In positioning ourselves to profit from the coming TLT decline, we can use out-of-the-money call spreads to establish a high probability of profit.

Sell the TLT May $134/$138 call spread by selling to open the May $134 call and simultaneously buying to open the May $138 call for a net credit of 45 cents.

Consider it a bet that TLT fails to rise above $134 by May expiration — which it shouldn’t if the recent topping pattern in the bond ETF proves prescient.

The maximum reward is limited to the initial 45 cents and will be captured if TLT remains below $134. The maximum risk is limited to the distance between strikes minus the net credit, or $3.55, and will be lost if TLT rises above $138.

To minimize the loss consider exiting if TLT rises above near-term resistance at $132.80.

At the time of this writing Tyler Craig owned bearish positions on TLT.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/tlt-have-treasury-bonds-hit-a-top/.

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