If you were waiting on Janet Yellen, chances are you’re still anxious for answers. But if you’re looking to position for a still uncertain situation, look no further than a TLT spread combination in the iShares Barclays 20+ Yr Treas.Bond (NASDAQ:TLT).
“Longer for lower” or not? It’s a fair question following Janet Yellen’s Fed’s interest rate tap dance at Jackson Hole and what that might mean for Treasuries and the highly liquid TLT ETF.
Investor uncertainty has only intensified speculation on September’s FOMC (let alone December’s policy meeting) and whether it results in a second round of tightening — or even the possibility for additional accommodative action.
Depending on the data, it appears anything is still possible. The good news is that the uncertainty is manifesting itself into a powerful and playable price pattern and limited risk options trade in TLT.
TLT Stock Weekly Chart
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Given the longest-standing bull market in Treasuries, a multi-year resistance line on the TLT chart and near zero interest rates that are sure to bite back at some point, there’s a slew of reasons that support a bearish fade of the TLT uptrend.
However, trends can persist longer than most think possible. And while the bullish run in Treasuries spans decades, it’s hard to call a top, especially when we’re already witnessing negative interest rate policy elsewhere in global interest rate products.
It’s also hard to call a top in TLT when a weekly symmetrical triangle (an explosive, neutral price pattern) is developing, as stochastics dips into an oversold condition.
TLT Modified Volatility Play
As we’re unsure of which direction TLT might move next (but confident a decent-size price reaction is nearing), a limited-risk bullish and bearish spread is attractive.
One combination offering a nice balance of reduced premium risk (and the ability to capture either a breakout or breakdown from the triangle) is the TLT Oct $142/$145 bull call spread and Oct $137/$134 bear put spread for up to $1.65.
At expiration, if TLT is trading above $145 or below $134, this neutral volatility trader will realize a profit of $1.35 or return of 82%. This is the result of one spread expiring worthless and the other vertical expanding to $3 minus the initial purchase price of $1.65 for the combined position.
The trader may also see interim profits closer to TLT’s current price if the anticipated move out of the triangle happens sooner rather than later, and/or an increase in implied volatility occurs.
Bottom line, there is risk if TLT remains between both inside strikes or fails to move beyond either breakeven point of $143.65 or $135.35. However, given the situation both on and off the price chart, as well as reduced and limited risk features, this combination is worth considering.
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.
