The massive rounded top in bonds that has been six months in the making finally cracked two weeks ago.  Following the latest Fed announcement on March 13, a massive capital shift ensued as money flowed out of the bond market and into the welcoming arms of equities. The trading volume that accompanied the two-day plunge was the highest seen in the iShares Barclays 20+ Year Treasury Fund (NYSE:TLT) since September of last year.

Given that major support has been broken in the ETF and the 50-day moving average (blue line in chart) is now slowing downward, one could make the case that a longer-term trend change is afoot. If indeed more downside is in the offing, then last week’s three-day rise in bonds is likely a sucker’s rally that should be sold.

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Traders looking to exploit the inability of bond prices to reclaim the 50-day moving average should consider using options to play this theory. Particularly, they should think about selling bear call spreads.

The bear call spread consists of selling a lower-strike call while buying a higher-strike call in the same expiration month, resulting in a net credit to enter the trade. Typically, shorter-dated options are used to take advantage of the higher rate of time decay. The max reward is limited to the initial credit received while the max risk is capped at the distance between strikes minus the credit.

Traders could “sell to open” the May 116 call and “buy to open” the May 121 call for a net credit of 94 cents or better. Provided TLT remains below $116 by May expiration, both options in the call spread will expire worthless, allowing you to capture the entire $94 profit. The risk is limited to $406 ($500 minus $94) and will be incurred if TLT rises above $121 by May expiration.

Breakeven on the spread is $116.94, or the short strike plus the credit collected. As long as TLT is trading below this level when May options expire, the bear spread will be profitable.

At the time of this writing Tyler Craig had no positions in TLT.