The recent resurrection of stocks from the depths of the post-FOMC announcement selloff has slackened demand for bonds in the short-term. After peaking last week at $123.87, the iShares Barclays 20+ Year Treasury Bond (NYSE:TLT) exchange-traded fund has dropped roughly 6%. However, since the beginning of the year dip buyers in TLT have been rewarded quite handsomely. The current retracement may be yet another in a long line of buying opportunities.
Given the heightened volatility in bonds, implied volatility remains on the high side, making me lean toward suggesting option selling strategies. One of the more popular plays involving a bullish bet on the underlying equity and a bearish bet on volatility is the bull put spread. The strategy is also referred to as a vertical credit spread and involves selling a higher strike put while buying a lower strike put in the same expiration month. The maximum reward is limited to the net credit received at inception. The maximum risk is limited to the distance between the strike prices minus the net credit.
Since the strike prices are listed in one-dollar increments, TLT option traders have plenty of flexibility in structuring a spread which offers the right balance between risk, reward, and probability of profit. Those looking for a higher probability play may consider selling the Oct 110-105 put spread currently valued around 53 cents. To enter the position, traders sell to open the Oct 110 put while buying to open the Oct 105 put.
Source: MachTrader
At the time of this writing, Tyler Craig had no positions on TLT.
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