TLT: Exploit the Boom in Treasury Bonds

A premium idea: Trade covered calls on TLT

Don’t look now, but one of the world’s most hated asset classes is making a comeback. That’s right. The seemingly inevitable decline in Treasury bonds — and, by extension, the popular iShares 20+ Year Treasury Bond ETF (TLT) — has been interrupted.

No doubt, bondholders everywhere are rejoicing at this widely unexpected, yet desperately needed rebound in Treasury bond values on the heels of a sharp decline in interest rates. Compared to last year’s 15.9% drubbing in TLT, the 5% rally captured so far in January represents a nice change in tune. Year-to-date, the 10-year yield has fallen sharply down to 2.77%.

And yet, despite the newfound optimism in the bond market, the longer-term picture remains resolutely bearish.

First, let’s take a more focused view at the technical posture of TLT. Then, I’ll highlight how holders of the bond ETF can use the latest relief rally to their advantage.

TLT: It’s Not Sittin’ Pretty

In the weekly chart of the TLT ETF shown below, you’ll see the fund remains firmly entrenched in a downtrend.

Click to Enlarge

Although the momentum of the downtrend may be waning a bit, TLT has yet to break resistance and reverse the series of lower pivot highs and lower pivot lows that are in place. Further, the declining 50-period moving average will add to the difficulty for the bond ETF to reverse its downward march. While the rally might continue for a while longer, significant resistance sits overhead near $108.50.

Owners of TLT can use its latest surge as an opportunity to sell covered calls. The benefits provided are twofold.

First, the amount of premium received from selling call options against the bond fund will boost the overall return on your investment. With the tactical selling of covered calls, you can boost the yield for the fund, which currently sits at a paltry 3.1%.

Second, the premium received will provide a modicum of downside protection should TLT slide back down in the coming month.

For every 100 shares of TLT you own, sell one Feb 108 call option for 50 cents or better. By selling the call, you are obligated to sell 100 shares of TLT at $108. If the bond ETF remains below $108, the option will expire worthless at February expiration, allowing you to pocket the $50 received at trade entry.

Throughout the year, owners of TLT should consider selling other covered calls following the occasional rallies in the fund.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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