TLT: Bonds go Boom, And Here’s the Trade to Thrive

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Traders awoke this morning to fear dripping from the walls. Yet another equities swoon transpired overnight, but such is becoming commonplace.

TLT: Bonds go Boom, And Here's the Trade to Thrive

The story of the day is the utter moonshot out of gold and treasury bonds. The iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) opened higher by more than 1% while the SPDR Gold Shares (GLD) jumped over 3.5%.

The parabolic rise in TLT has flight to quality written all over it.

Investors fleeing the carnage in equities are scurrying headlong into the perceived safety of bonds. And not just any bonds, mind you — U.S. Treasury bonds. The creme de la creme.

Traders itching to follow the crowd into TLT should think twice.

The first stat that should give you pause is the extreme, and I mean extreme, overbought conditions of the bond ETF. Year-to-date, TLT is up 11%. That may not sound like much, but for a boring old bond ETF, that’s an outlier of a move if ever there was one.

TLT
Source: OptionsAnalytix

The RSI indicator — an oscillator generating overbought and oversold signals — is perched at its highest level in almost four years. With the bond ETF in such a lofty position, the risk-reward is asymmetrically favoring the bears. Would-be buyers should wait for a pause, or better yet, a pullback to generate a lower-risk entry point.

TLT’s ascent has been accompanied by a notable uptick in demand for options. Not surprisingly, many bond bulls have elected to buy up options to position themselves for upside. The demand surge has driven the implied volatility rank for TLT options to 85%, signaling option premiums are inflated.

A TLT Bond Bet for Income

It wouldn’t surprise me if TLT transitions to more range-bound behavior in the coming month. Dips will likely be bought due to its uptrend, and further upside should be limited due to its extremely overbought status. That, coupled with the high implied volatility, is making iron condors an attractive play.

The iron condor consists of simultaneously selling a bull put and bear call spread.

Sell the March $141/$144 bear call spread and the March $126/$123 bull put spread for a total net credit of 60 cents or better. The max reward is limited to the initial 60 cents and will be captured if TLT sits between $126 and $141 at expiration.

The max risk is limited to the distance between strikes minus the net credit, or $2.40, and will be lost if the bond ETF either rises above $144 or falls below $123 by expiration.

To minimize the loss, consider exiting the bull put if TLT falls to $126 (the short put strike) or exiting the bear call if TLT rises above $141 (the short call strike).

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/tlt-bond-etf-goes-boom/.

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