TLT ETF: The Time for Bond Bears to Strike Is NOW!

Bond traders are eyeing December’s Federal Reserve meeting with increasing interest. The long-awaited hike in the Fed Funds rate might finally, finally, arrive. At least that’s what the market is indicating.

Currently, the Fed Fund futures are pricing in a 72% probability of a rate hike during Janet Yellen’s upcoming pow-wow (the FOMC meeting) on Dec. 16.

Never one to wait, the financial markets have already shifted slightly in anticipation of a December hike. U.S. Treasury Bonds plummeted following the Fed’s last announcement, sending the iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) down some 5% during the aftermath. Due to their inverse relationship with prices, bond yields (which essentially represent interest rates) lifted concurrently with the bond price plunge.

Over the past few weeks, however, the TLT ETF has recovered half of its post-FOMC meeting losses as bargain buyers emerged to snatch up the otherwise oversold fund. While the recent strength in TLT is a minor annoyance to traders already short bonds, it does present a compelling opportunity for spectators wanting to try their hand at profiting from the increasingly likely rate hike next month.

With TLT now running into a declining 20-day moving average, not to mention the 50-day moving average that looms closely overhead, now is as good a time as any to consider new short plays for U.S. Treasury Bonds.


Source: OptionsAnalytix

Here are two trades that will deliver should bond prices fall in the coming month: one aggressive, one conservative.

Swing for the Fence

Buy the Jan $121/$117 put spread for $1.67. The max risk is limited to the initial $1.67 debit and will be lost if TLT sits above $121 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $2.33, and will be captured if the TLT ETF falls below $117 by expiration.

Easy Does It

Sell the Dec $123/$126 bear call spread for 48 cents credit. The max reward is limited to the initial 48-cent credit and will be captured if TLT remains below $123 by Dec expiration. The max risk is limited to the distance between strikes minus the net credit, or $2.52, and will be lost if TLT rallies above $126.

As of this writing, Tyler Craig owned bearish trades on TLT.

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