iShares Barclays 20+Yr Treas. Bond (ETF): Two Safer Haven Bond Plays in TLT

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Long bonds in 2016 aren’t your father’s or granddad’s safe haven, but that doesn’t mean there aren’t lower risk opportunities with attractive yields. Specifically, using TLT options to position in the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) looks plenty tempting.

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A global negative interest rate environment coupled with the surprise Brexit vote nearly two weeks ago has sent the U.S. 20-year bond soaring to record highs with TLT rallying in excess of 7%.

The rally in TLT has caught most investors flat-footed following the Federal Reserve’s first, and very drawn out, rate hike in several years as it attempts to wean the Street off easy credit.

The temptation to ride the TLT trend on its premise of positive yield is better than nothing, and the negative rates investors are dealing with overseas makes 1.7% yields seem reasonable.

The problem with this logic is the greatest bond market rally in history isn’t reasonable — well, other than maintaining a firm belief in Wall Street’s latest siren song of “longer for lower.”

The difficulty with this type confidence in TLT is remembering past bubble phrases like “bricks and mortar,” “land shortage!” or “peak oil!” and appreciate how well that worked out for investors buying what Wall Street was keen on selling.

But as the TLT chart and a couple options strategies will show, there are definitely safer haven plays for bulls and even bears, seeking opportunities in bonds at this time.

TLT Stock Monthly Chart

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Click to Enlarge
Source: Charts by TradingView

In fact, the historic rally in bonds has been going on for decades and not just the 13 years of price history found in TLT. As much, it’s important to remember all trends do end at some point, and the one in bonds is looking very long in the tooth.

Technically, the monthly chart in TLT reflects past instances where price action wandered outside the Bollinger band on overbought activity — the outcome for bulls was difficult at best. More often than not, it proved a poor time to invest in TLT.

TLT Collar Trade

If you’re still inclined to believe in the bull case for TLT, a limited risk collar makes sense.

Reviewing the TLT options board, the September $150 call/$135 put can be collared for 23 cents with shares at $141.95 as the protective put and written call trade for $1.27 and $1.50, respectively, as of this writing.

This bullish strategy can yield around 5.5% over the several week holding period if TLT is above $150 at expiration. Risk in owning TLT stock is limited to $135, which means any significant movement in TLT below that level is not a concern for this bullish trader.

Adjustments to the collar are also possible. Given favorable movement in TLT the trader has the potential to decrease risk and increase profits over time by rolling the strikes up and out.

TLT Bearish Butterfly Strategy

If you’re open to fading the current risky trend, a bearishly positioned long butterfly in TLT is a low-cost, limited risk position with large profit potential.

One such spread on TLT is the August $141/$137/$133 put butterfly for 77 cents. Risk is defined by the debit paid and offers an expiration payoff of $3.23, or 419%, if TLT landed perfectly on the $137 middle strike.

More realistically, a nice sized expiration profit zone in-between $133.75 to $140.25 and opportunity for smaller, but more secure returns while cutting down risk further, make being a bear in TLT a much easier proposition with this butterfly strategy.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/ishares-barclays-20yr-treas-bond-etf-two-safer-haven-bond-plays-tlt/.

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