While a number of crosscurrents currently flow on Wall Street, none has captured the attention of the locals like the rip-roaring rally in interest rates.
The climb in 30-year bond yields continued this morning with a gap above the 3.1% mark. Just last month yields stood at 2.5%, making this a rapid 24% ascent.
Bond prices — which move inversely to rates — are following the glide path of an 8-ton anvil.
The king of bond ETFs, iShares 20+ Yr Treasury Bond (ETF) (NYSEARCA:TLT), appears to be fatally wounded. Its ongoing dive has broken support levels aplenty and resulted in a reversal of its long-term uptrend.
At $118.90, TLT is now down 14% from its all-time highs from January. Not yet in bear territory, but it’s certainly getting closer.
Not surprisingly, the TLT ETF is oversold by just about any metric. To put into perspective the depth of its descent, the RSI indicator has fallen to levels not seen since 2009.
With bond holders shaking in their boots and TLT appearing as if it will never rise again, now is the time to strike for contrarians.
Alongside the bond slide, implied volatility in TLT options has ramped higher making option premiums expensive and thus more attractive to sell. And with TLT already having fallen so far in such a short period of time, I suspect the selling pressure is due to ease up.
Fortunately, we can structure a trade that takes advantage of a slightly bullish bias on TLT while exploiting its potentially overpriced options.
TLT Put Spreads Beckon the Brave
Sell the Jun $113/$110 put spread for 37 cents. The trade is entered by selling the Jun $113 put and simultaneously buying the Jun $110 put. Consider it a bet that TLT sits above $113 by expiration.
If the puts expire in the money you will pocket the maximum reward of 37 cents, which is about a 14% return on investment.
The maximum risk is the distance between strikes minus the net credit, or $2.63, and will be lost if TLT descends below $110.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
