Despite much overnight volatility in the futures market, stock traders awoke this morning to quite the blasé reaction to yesterday’s U.S. airstrikes. In early morning trading, the percentage move in the S&P 500 is hovering around zero. But while the fear uptick isn’t causing any mass exodus from stock land, it is causing some notable inflows into gold and bonds.
To wit: the SPDR Gold Trust (ETF) (NYSEARCA:GLD) was up over 1% while the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) was up 0.6% in the morning.
If you think the fear trade has legs, then today is as good a day as any to analyze safe-haven assets for bullish plays. From a charting perspective, the TLT ETF has the more interesting setup, so let’s focus on the bond market.
For an asset class as universally unloved as bonds, they’ve staged quite the rally of late. TLT — Wall Street’s go-to Treasury Bond proxy — is up 4.6% since bottoming just before last month’s Federal Reserve meeting. The ascent has carried the bond ETF to the upper end of its five-month range.
Despite this morning’s fear-induced jump in TLT, it has yet to break out. The key price zone to watch moving forward is $122.50.
Each and every rally in recent months has failed in this area, which makes the threshold all the more impressive. If continued fear can push TLT through overhead resistance, we could see quite the upshot in treasuries. After the $122.50 zone, there really isn’t any significant resistance until the unfilled gap near $127.
The Long Bond Trade
Don’t chase today’s TLT pop. Wait for a successful breach above $122.50, then consider bullish bond trades. Option premiums have inflated sufficiently over the past week to make short option strategies attractive.
If the ETF breaks out, you could sell the May $119/$116 bull put spread. Right now it’s trading at 60 cents, but the credit will be less if you wait for the breakout. Your max reward will be limited to the initial premium received. To capture it, the bond ETF simply needs to sit above $119 at expiration.
The risk is limited to the distance between strikes minus the initial credit. To minimize the loss, I suggest exiting if TLT falls back below $119.
At the time of this writing, Tyler Craig held short option positions in TLT.
