Bonds have a one track mind and right now they’re obsessed with all-time highs. The iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) has been flying and now stands a mere 2% from its all-time high reached in early 2015.
The culprit for the sudden bond awakening is a three-headed hydra — one backing bond bulls with fury.
Its first head is the old flight to safety. Nothing sparks demand for Treasuries like a stock market drop, the likes of which we’ve seen this week.
The second head is the Federal Reserve — specifically, expectations that Fed Chairwoman Janet Yellen and crew will not raise rates during this week’s meeting.
Finally, the third head is the upcoming Brexit vote that has anxiety and volatility expectations running hot. Weak hands in search of safety always find themselves turning to bonds and bond ETFs.
TLT’s rip has been accompanied by quite the surge in demand for options. That’s right, bond lovers haven’t been content to scooping up shares of TLT only, they’ve gone for the jugular by grabbing derivatives. The leverage potential has their eyes bulging.
The implied volatility rank has lifted to 50%, a four-month high, signaling option premiums are now ripe for the selling. Two tasty trades come to mind.
Twin TLT Trades for Premium Sellers
With TLT reaching extreme overbought levels, contrarians are taking note. The risk/reward for bearish plays is beginning to look mighty attractive. If you think the bond ascent loses steam, consider selling the July $141/$144 bear call for 33 cents. The reward is limited to the initial 33 cents and will be captured if the bond ETF sits below $141 at expiration. Currently the market is pricing in an 81% probability of success for this spread.
Those wishing to adopt a more neutral posture on bonds could enter a July iron condor. Sell the aforementioned July $141/$144 bear call spread but tack on a July $130/$127 bull put spread for 37 cents credit. The $3-wide iron condor can be sold for a net credit of 70 cents. The initial credit represents the max reward and will be captured if TLT sits between $130 and $141 at July expiration.
Elevated volatility is providing condor sellers with a very wide profit range.
At the time of this writing, Tyler Craig owned short call spreads on TLT.
