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.

Get Free Updates

Join thousands of investors who get the latest news, insights and top rated picks from StockNews.com!

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: Steve Smith

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

Get Free Updates

Join thousands of investors who get the latest news, insights and top rated picks from StockNews.com!

Top Stories on StockNews.com

NASDAQ: GWPH | GW Pharmaceuticals Plc News, Ratings, and Charts

Why Investors Should be Bullish About GW Pharmaceuticals (GWPH)

GW Pharmaceuticals (GWPH) has been on a steady downtrend since they reported their last quarterly earnings in November.
NASDAQ: FB | Facebook, Inc. -  News, Ratings, and Charts

Why I Believe Facebook (FB) is Headed Higher

It’s been a relatively quiet couple of years for Facebook (FB), with the stock up barely 10% since the end of 2017, just one-third of the performance of its Nasdaq-100 (QQQ) benchmark.
NYSE: SPY | SPDR S&P 500 News, Ratings, and Charts

Five Steps Towards Building a Passive Aggressive Portfolio

The trend of index or “passive” investing accelerated following the financial crisis and seems to now represent a generational shift in the way investors approach the stock market.
NYSE: SPY | SPDR S&P 500 News, Ratings, and Charts

The Most Important Economic News Investors Should Care About This Week

This week will be chock full of important economic news that could send the S&P 500 surging or plunging, depending on the outcomes.
NASDAQ: VOD | Vodafone Group Plc each representing ten Ordinary Shares News, Ratings, and Charts

Top 10 Perfect Stocks for December

How about 10 stocks that blend growth + momentum + value + timeliness. VOD and IGT are just 10 of the stocks that make the grade. Find the full list of these "perfect" stocks below.

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
Page generated in 1.1624 seconds.