iShares Barclays 20+ Yr Treasury Bond (ETF) (TLT): Sell Risk for Income

The Federal Reserve’s tightening cycle has held the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) hostage. As rate hikes loom, it’s hard to argue for a rise in bonds. When rates rise, bonds fall. These are unusual times in markets and they are not behaving predictably. Money is flowing into the U.S. treasuries thereby keeping a bid under TLT ETF.

Almost all bond experts agree that the bond market is in a bubble. Most of them have been expecting a crash for years, but it’s been late in coming. Eventually there will be a bubble burst, but for now — T.I.N.A. That is, “there is no alternative.”

I bet this continues longer still and into the fall. There will be risk from Europe. In its last meeting, and although they didn’t set a schedule, the ECB discussed raising rates. Higher rates in Europe could reduce demand on U.S. bonds thereby putting downside pressure on the TLT.

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The Bet: Sell TLT Sept $109/$107 credit put spread for 45 cents per contract. This is a bullish trade for which I need TLT to stay above my sold spread. I have a 90% theoretical chance of yielding 25% on money risked.

Usually I like to hedge my bet by selling opposing risk. In this case, I feel like I should do it since the ECB threat could keep a lid on the upside potential of bonds. After all, the U.S. Fed is in a tightening cycle and rates are going to rise two more times this year.

The Hedge (Optional): Sell the TLT Sept $127/$129 credit call spread for an additional 25 cents per contract. I have a 75% theoretical chance that TLT will stay below my sold risk.

By taking both sides, I would have sold an iron condor. This is a range trade where TLT needs to stay between both spreads. Since I can only lose on one side or the other, the iron condor reduces my maximum risk thereby raising my potential yield to 50%. Selling risk into tight ranges is a thread-the-needle type trade. Therefore, in this headline-driven market I need to manage my risk’s chances of success.

Nicolas Chahine is the managing director of As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

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