Over the past two weeks, U.S. Treasury bonds have quietly undergone one of their biggest selloffs in many moons. The steep uptrend that has taken root in the popular iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) was bound to lose steam sometime.
And it looks like that sometime is now.
With gravity now exerting some influence on bond prices, two-sided price action has returned. And more interesting opportunities have come along with it.
While the TLT ETF is finally experiencing some selling pressure, talk of a major top in bonds is premature. The weekly chart of TLT remains firmly entrenched in an uptrend making the past two weeks appear as a run-of-the-mill pullback in an otherwise strong trend. Would-be bond buyers are likely eying this dip with interest. It certainly provides a lower-risk entry into TLT relative to buying a few weeks ago.
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A deep dive into the daily chart of TLT reveals a bounty of potential catalysts for at least a short-term rebound. Here are the top three:
- The volume amid the recent downturn has been fairly muted. One or two high-volume down days have crept in, but nothing to signal any type of mass exodus from shares of TLT. Distribution has been contained.
- TLT has reached the lower Bollinger band, signaling oversold conditions. Previous forays to the lower band have provided low-risk buying opportunities.
- The 50-day moving average also looms closely. This key intermediate-term moving average often serves as a gathering ground for sidelined bulls waiting to pounce.
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Capitalize With TLT ETF Options
The ongoing excitement in bond ETFs like TLT has kept the implied volatility elevated. With an IV rank just shy of 77%, TLT option premiums remain juicy. Traders looking to exploit the pullback in TLT should consider entering a bull put spread.
Sell the Mar $125/$120 put spread for 71 cents or better. The max reward is limited to the initial 71 cents and will be captured if TLT remains above $125.
The max risk is limited to the distance between strikes minus the net credit, or $4.29 and will be lost if TLT falls below $120.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
