New Trade $TLT: Bonds On Steroids

by Dan December 16, 2014 11:42 am • Commentary

The yield on the 10 year Treasury almost got to 2% this morning, down from 3% at the start of the year, and the TLT (the iShares 20yr Treasury Bond etf) nearly matched the October 15th panic high of $127.68 this morning.  The TLT certainly looks a tad overbought in the very near term in front of the potential for the Fed to remove their low rates for a “considerable time” language tomorrow, when they conclude their 2 day meeting. Yes a tad overbought, despite the velocity of the oil price decline and that of what appears to be a spiraling out of control situation in Russia.

It is my sense if the Fed were to remove the language, and the recent downward volatility were to have already discounted the potential that the Fed is in fact on pace to raise rates in mid 2015, then we could see a little re-tracement in bonds in the next couple of days/weeks as we head into what should be a bit calmer Holiday trading.

Looking at the chart of the TLT, it seems that there is an air pocket in between $126 and $123 that could easily filled in:

TLT 1yr chart from Bloomberg
TLT 1yr chart from Bloomberg

I want to make a very short term contrarian bearish bet on bonds with defined risk.

TRADE: TLT ($126.55) Buy to Open Dec 26th (weekly) 126 weekly put for $1.00

Break-Even on Dec 26th (weekly) Expiration:

Profits: below $125

Losses: of up to 1.00 between $125 and $126, max loss of 1.00 above $126. or less than 1% of the underlying etf price

STOP: going to know very quickly if I am wrong and will look to close at a 50% loss