While stocks continue their dithering, bond prices have been quietly climbing out of the abyss. After a post-election shellacking, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) is finally getting a reprieve.
Since troughing in mid-December, TLT is up 4.7% amid what is likely a dead-cat bounce. While the rally has carried shares back above the 20-day and 50-day moving averages, numerous overhead resistance levels remain. The problem for TLT bulls is that November’s nasty downturn broke several key price floors which are now apt to act as ceilings.
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A glance at the bond fund’s weekly chart (not shown) reveals the past few weeks have created a bear retracement pattern, nothing more.
If you were falling all over yourself to short bonds into year-end due to the atrocious price action, you should be even more excited about bear plays now. The rebound has ushered TLT to a much better vantage point for bearish trades.
Chart patterns aside, as long as higher rate fears rule the Street, any and all bond rallies should be viewed with extreme skepticism.
Bet That Bond Prices Bomb With TLT
The beauty of options trading is the creativity it offers for building trades. Given our bearish outlook on bonds, let’s say we are willing to have our directional exposure increase as TLT rises … the rationale is as follows: The higher bond prices rise, the more confident we are that the pull of higher rates will finally cause them to tumble.
To accomplish this we can sell a Feb $126/$129 bear call spread for 35 cents. The position consists of selling to open the Feb $126 call while buying to open the Feb $129 call. Consider it a bet that the TLT exchange-traded fund sits below $126 at expiration.
The max gain is limited to the initial 35 cents credit. The max loss is limited to the spread width minus the net credit, or $2.65, and will be lost if TLT sits above $129 at expiration.
To limit the loss you could exit the trade if the ETF rises above $127.50, which is the gap area from the post-election drop.
At the time of this writing, Tyler Craig owned bear call spreads in TLT
