The stock market has captured the attention of the masses with its gut-wrenching twists and turns of late. But equities aren’t the only area where the dreaded volatility monster has made an appearance. His influences have been felt in the world of bonds as well.
The kingpin of bond ETFs — iShares Barclays 20+ Year Treasury Bond ETF (TLT) — has seen its share of whoops and whirls in recent days as panic-fueled investors scurried into the safe haven of treasuries and scurried right back out. On the heels of the stock rebound, bond prices have been slammed.
Since its peak last Monday of $128.92, TLT has fallen nearly 6% — a notable move for a bond fund.
The case for continued weakness in bond prices is compelling at this point. On the technical front, TLT has been stumbling. Recent selling pressure has been accompanied by heavy volume, suggesting mass distribution. Though TLT remains above the 50-day moving average, the recent drop was sufficient in carrying TLT below the 200-day and 20-day moving averages, reversing what was otherwise a bullish trend.
And don’t count out the specter of higher interest rates that has been harassing bond holders for years now. Though TLT experienced a nice little rally from July to August, all it takes is a little interest rate scare to deliver losses anew.
I find it particularly interesting that bonds weren’t able to muster together any decent upside action during Tuesday’s trading session. With stocks in free-fall, you would think the old flight to safety trade would drive bonds northward, but TLT remained heavy all day.
TLT Put Spreads for Massive Returns
If you think the TLT is going to fall further in the coming months, consider buying put spreads to profit.
Buy the Nov $120/$115 put spread for $1.80 or better. The trade is initiated by buying to open the Nov $120 put while selling to open the Nov $115 put. The max risk is limited to the initial $1.80 debit and will be lost if TLT sits above $120 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $3.20, and will be captured if TLT falls below $115 by expiration.
By risking $1.80 to capture $3.20, the spread offers a potential return on investment of 177%.
As of this writing, Tyler Craig held neutral option positions on TLT.
