[Options] Bonds Ready to Move?

Sean McLaughlin
May 15, 2020

In March, the up move and subsequent retracement in Bonds was breathtaking and had the world's attention.

In April, Bonds spent most of the month "normalizing," at a newer, higher level.

Here in May, we're starting to see signs that another move to the upside is materializing. Here's a quote from JC in a recent email to All Star Chart subscribers:

If you're looking for an uptrend, it's in the bond market, NOT the stock market.

...the technical setup in Treasuries looks much better than it does for Stocks right now, over both long and short-term timeframes. TLT is trading just a few percent off all-time highs as price just broke above a confluence of resistance.

And here's the chart of relative strength between $TLT and $SPY that adds further evidence of a resumption of trend for TLT:

I agree with JC and it feels like a good time to get long TLT here. Using options to express my bullishness, I'm going to put on a trade with defined risk that will profit from a resumption of trend to and through the high tick for $TLT in March. And I'm going to give myself some time for the move to materialize.

Here's the Play:

I'm buying a $TLT August 170/180 Bull Call Spread for approximately $2.50. This means I'll be long the 170 calls and short an equal amount of 180 calls. The debit I pay to enter this spread is the most I can lose if $TLT reverses course.

Although my risk is defined in this trade, I'll close the trade down to limit my potential loss if $TLT closes below $160. Also, I'll look to close the spread down if/when there's only $1.25 in premium left in the position. Take the loss and move on.

Assuming neither above scenarios happen, then I'll look to take profits in this trade if/when I can close it for around $6.25 -- which would represent about 50% of the maximum available profit in this spread. While the options don't expire until August, I have no intention of holding it that long if I can help it.

All Star Options subscribers with questions on this trade, please send them here.

~ @chicagosean

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