What will the Federal Reserve do with interest rates? One thing is certain, we know a hike is coming at some point in our lifetime.
In the interim though, the iShares 20+ Year Treasury Bond (TLT) is offering traders an opportunity to position as if zero interest-rate policy is here to stay, but knowing it’s really not, using a July call contract.
The latest Fed futures estimates a 53% chance policymakers will raise rates by 25 basis points at its September meeting. While we wait with bated breath, I’d like to propose looking at a bullish trade in TLT using the chart, options and money management.
TLT Stock Daily Chart
Do you see the downtrend in the daily chart of TLT? I’m referring to the downtrend defined by that series of lower highs and lower lows.
And do you notice the bearish death cross that signaled earlier this month when the 50-day simple moving average crossed below the 200-day simple moving average? At face value, they’re bearish harbingers for TLT if technicals are believed to at least rhyme over time.
Now I’d like you to focus on Fibonacci and a bedfellow of other technicians. Currently, TLT is testing its 62% retracement level as part of its cycle low from December 2013 to the cycle and all-time highs this January. That’s bullish.
Next, realize the test in TLT is a second stab at this price level and represents a small two-week long double bottom. Finally, I’d like you to notice the 1,000-day simple moving average. That’s bullish too.
“Now, wait just a second!” That’s right, that TLT moving average isn’t on the chart. But it is there on the weekly view and it’s called the 200-week simple moving average. Not only that, it’s where the current double bottom has found an additional level of technical support.
The situation in total may sound like a fairly even fight amongst bears and bulls in TLT. But, what the technical picture suggests to this strategist is higher prices and a counter-trend rally will come first before being thwarted by resistance from the two visible moving averages in the range of $122 to $125 found on TLT’s daily chart.
As that type of upward movement amounts to roughly 4% to 7% in TLT stock and TLT also sports liquid dollar-wide options — this spells opportunity for bullish positions in the short-term.
TLT Stock July Long Call
In reviewing TLT’s options board, the Jul $117.50 call for $1.45 is priced well for our stated purposes. With current directional risk just over 40 deltas, if TLT were to break the double bottom pattern low, money management should help contain the max risk of $1.45 to 60 to 75 cents.
If you’re thinking premiums and volatility are running slightly high for a long call strategy, my reply is “it depends.” The daily chart shows volatility levels just off their YTD highs, but implieds are in line with underlying TLT stock volatility.
Also, volatility is forward-looking in that it anticipates future expectations. Hence, accepting the matching implied and underlying TLT volatility as a Zen-like “it just is” situation is kosher to this former market maker.
Lastly, front month premium is more about decay risk at this point than getting hurt by vega or volatility risk. With that in mind, using a time stop if needed or what we see as the more real threat of a technical breakdown in TLT, is advisable with this sort of positioning.
On the upside, should TLT stock begin to move higher, this at-the-money July call should do well. There is less than four weeks to expiration, but TLT does have a knack for making moves like we’re expecting, in one to three weeks. And with dollar strikes available; the opportunity for profitable adjustments along the way would definitely be available to further reduce risks and maximize potential gains.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
