A Clear-Cut Strategy for Range-Bound Bonds

NASDAQ: TLT | iShares 20+ Year Treasury Bond ETF News, Ratings, and Charts

TLT – Today’s featured article gives readers a clear cut strategy for range-bound bonds. Continue reading to find out more details.

The bond market has had a volatile two months as it went from an inverted yield curve and rates on the 10-year sinking below 1.5% in September to a normalized curve and yield on the 10-year filing with a  2% level.

This has been a welcome relief for both stock investors and savers who need income for retirement funds, as the inverted curve is often a precursor to a recession and the near-zero yields forcing people into dividend-yielding stocks such as utilities at increasingly uncomfortable valuations.

Now, with the Federal Reserve, having delivered the expected third rate cut of the year, but also made it clear barring an exogenous event planned to be on hold for the foreseeable future.  Today’s testimony from Chairman Powell reaffirmed that stance as Powell cited solid economic data and the fact that the amount of global debt with negative yields had retreated, making him comfortable with the current policy.

I think the Barclays iShares Long-Term Bond ETF (TLT), which stands a good proxy for the 10-Year Treasury,  will be bound by the $132.50 and $141 level, which corresponds to about 2.15% and 1.65% on the 10-year.

tlt stock chart

This creates a great opportunity for an iron condor.  An iron condor is an options strategy created with four options, consisting of two puts (one long and one short), two calls (one long and one short), and four strike prices all with the same expiration date. The goal is to profit from a decline in volatility and a range-bound price in the underlying asset.

In other words, the iron condor earns the maximum profit when the underlying asset closes between the middle strike prices at expiration.

As you can see, both realized and implied volatility for TLT surged in September/October and took another upturn during the last week.  I expect IV to retreat back below 10% in the coming weeks.

TLT volatility chart


Many traders that use iron condors and credit spreads as an ongoing strategy, tend to enter their trades every first or second week of the month, or they have established a hard number of days before expiration where they force themselves to enter their positions mechanically.

In my experience, this is not the best way to trade these strategies. This doesn’t mean you cannot be profitable trading that way, merely that I personally think there are better ways.

The problem with iron Condors and credit spreads is that you are usually risking a lot to win a little. So, entering a position is not something you should take lightly. It is my personal belief that they should only be traded when odds are clearly in your favor. If the conditions are not given, then staying put is the best decision.

Right now, with the TLT trading at $136.50 both the bull and bear spreads meet the criteria of having a good probability of delivering a profit and, as mentioned, IV is still elevated making it a perfect set up for the iron condor.

The trade I’m looking at is the December 131/133-141/143 for a $0.75 net credit.

TLT Snapshot Analysis

As the risk graph above shows, this position has a near 60% probability of delivering a profit of 60% return on your risk.  That is a great profit for a position that needs nothing but time and stable prices over the next month.

TLT shares were trading at $136.31 per share on Wednesday afternoon, up $0.69 (+0.51%). Year-to-date, TLT has gained 14.44%, versus a 25.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
TLTGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com

Is This REALLY a Bull Market?

The S&P 500 (SPY) keeps making record highs...but does that mean that market conditions are truly bullish? 44 year investment veteran shines a light on how hollow recent gains are as they are only accruing to a handful of stocks with most investors searching high and low for stock market gains. Read on for more...

Unveiling Adobe (ADBE) Q2 Earnings: What Lies Ahead for Investors?

Software giant Adobe Inc. (ADBE) has released its second-quarter earnings, revealing double-digit growth in both revenue and profits. Yet, concerns arise around the complexities of navigating growth in the face of advancing AI technologies. Let’s analyze ADBE’s recent performance and assess key fundamentals to uncover what lies ahead for investors…

3 AI Stocks to Invest in for the Next Technological Revolution

The AI market is experiencing a significant growth trajectory, driven by widespread application across various industries. Hence, it could be wise to invest in top AI stocks, Alphabet (GOOGL), Meta Platforms (META), and Alibaba Group Holding (BABA) for the next technological revolution. Read more...

Analyzing Broadcom’s (AVGO) Q2 Earnings: Worth Investing?

Driven by a surge in demand for its AI products, Broadcom (AVGO) reported robust earnings in its latest quarterly results, exceeding expectations on both top and bottom lines. However, is the stock’s recent announcement of a 10-for-1 stock split worth investing in? Keep reading to find out…

Bullish or Bearish Stock Set Up?

The S&P 500 (SPY) record highs sounds pretty darn bullish on the surface. Yet as we dig below the surface there are some curious signals that point more Risk Off. This is especially true as we come into the next Fed meeting after a round of data that points to inflation still being too high...only further delaying the first rate cut. What does this all mean for stocks from here? Steve Reitmeister offers his latest views on the market outlook along with a preview of his top picks to stay on step ahead of the market. Read on for more...

Read More Stories

More iShares 20+ Year Treasury Bond ETF (TLT) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All TLT News