It may be too early to tell whether QE2 will ultimately be good thing or a bad thing for stocks, but bonds certainly seem to be in a precarious situation.

So we’re looking at setting up an options trade on the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) designed to take advantage of a huge move in bonds to the downside that also has built-in protection if the market surprises us and bonds rally significantly.

In fact, the only way we can lose money on this trade is if the market remains more or less flat and TLT ends up around $100 at expiration.

Trade: Bearish credit back spread entered for a 20-cent credit

Buy to open TLT Nov 100 Puts (two contracts)
Sell to open TLT Nov 103 Puts (one contract)

Profit: Profit from an increase in volatility or a decline in TLT toward $97.

Max Loss: $270 per spread
Max Gain: Unlimited
Breakeven at Expiration: $97.20 or $102.80

This is an advanced strategy, but it is worth the effort. A back spread allows us to enter a trade with no cost (unlike a straddle or strangle) or even a small credit, and has unlimited profit potential and fixed risk. It is the best of both worlds in options, but it does come with risks and should be carefully managed.

I go into great detail in the video here to show you how to do this kind of trade and will be updating it on an ongoing basis.

Disclaimer: It is important to understand the risks of trading options before you attempt a trade like this. This article is for educational purposes only.

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