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Fade the Bond Pop for Profits using the iShares 20+ Year Treas.Bond (ETF)

Tyler Craig

Much has been said about rising interest rates boosting bank stocks, but the financial sector isn’t the only way to capitalize on this trend. The bond market and its accompanying ETFs offer a more direct path for rate-centered speculation. And while there are numerous products to play with, it’s the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) that warrants the most attention.

It’s the most volatile of bond ETFs and offers the best bang for your buck. Not to mention, TLT boasts superior liquidity for options traders.

Remember, interest rates and bond prices move in opposite directions. So rising rates cause TLT to fall in value.

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Click to Enlarge Source: OptionsAnalytix

A brief glance at TLT’s weekly chart reveals an asset that just recently began rolling over anew. Maybe it’s rising inflation expectations tempering demand for bonds. Or, maybe it’s the rockstar status of the stock market pulling capital away from them. Regardless of the reason, the bigger picture for TLT remains vulnerable.

The daily chart reveals the recent downtrend in greater detail.

Click to Enlarge Source: OptionsAnalytix

Bond prices are now submerged beneath a descending 20-day and 50-day moving average. To their credit, bond bulls are putting up a fight at the $122.50 support level, which has halted the descent thus far. This morning’s up-gap is returning TLT to the 20-day moving average. And while it may continue for a few days yet, it’s a rally destined to fail.

And that has me eyeing bear call spreads.

Bet with Bond Bears in TLT

To establish a wide range of profit, sell the Dec $126/$129 bear call spread for 54 cents. Consider this a bet that TLT will sit below $126 at expiration. In timing the entry, I suggest waiting for signs the fund is falling. Today’s rally is still going strong.

To further increase the odds of success, you could scale in. That is, sell half of the position now and wait to enter the second half when/if the value of the call spread rises to 80 cents. That will raise your average credit, allowing you to profit quicker when TLT finally does drop.

As of this writing, Tyler Craig held bearish positions in TLT. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.

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