Bond Volatility Goes Bonkers — Profit With the iShares Barclays 20+ Yr Treas.Bond (ETF)

TLT option premiums are pumped. So sell them!

The return of volatility and all the demons that accompany it hasn’t been isolated to stocks. This fear-causing, panic-inducing force has also been hounding bond prices. Because rising interest rates is one of the culprits spooking investors, equities and fixed income have been falling hand-in-hand. The technicals for long-term bond funds like the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) have soured significantly this month.

TLT: Bond Volatility Goes Bonkers -- Profit With the iShares Barclays 20+ Yr Treas.Bond (ETF)

Year-to-date, TLT is down 7%. For the uninitiated, that’s a big move for a bond fund. Think of it this way: TLT has a dividend yield of 2.6% so the losses over the last six weeks will take about three years worth of income payments to offset.

Like a millstone around the neck, the specter of higher rates continues to drag bond prices into the depths. With this year’s drubbing, TLT is fast approaching four-year lows. The trend across all time frames is now officially descending as confirmed by three oft-watched moving averages: the 200-day, 50-day and 20-day.

Pattern spotters will note TLT formed a six-month head-and-shoulders formation before this year’s breakdown. The tell to abandon ship was TLT’s break of the $122.40 neckline which completed and confirmed the top.

The next stop for the long-term bond is likely $115 to $116. Since 2015, bulls have staunchly defended this price zone halting numerous breakdown attempts.

While it may eventually fail, the initial test should be good for at least a modest price rebound. On the flipside, rallies in TLT are highly suspect now that the fund is submerged beneath all its moving averages.

Source: OptionsAnalytix

Throw it all together and we’re in a spot where picking up bearish exposure at higher prices, but bullish exposure at lower prices may not be a bad idea. Fortunately, there’s an options strategy that does just that: the iron condor.

One more element that makes selling iron condors attractive is the elevated volatility. All the excitement of late has driven demand for TLT options to the moon. Like stocks, the implied volatility rank for TLT is 100% suggesting option premiums are more expensive than they’ve been at any time over the past year.

Sell TLT Iron Condors

Sell the March $110/$113 bull put spread and the March $124/$127 bear call for a net credit of 50 cents. Consider it a bet that TLT sits between $113 and $124 a month from now. If it does, you will capture the 50-cent premium which represents a potential 20% return on investment. The initial cost (and max risk) is $2.50.

To minimize the damage you could exit if TLT moves too far out of the profit range such as above $125 or below $112.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

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