The set-up: Technically, bonds have re-traced back to the 200-hour moving average, which has been a strong point of support in the past, and which has played out in the last few days. The iShares 20+ Year Treasury Bond ETF (TLT) has bounced off of support and now is starting to climb higher.
The move is supported by the volatility trade, which has had people moving away from bonds as they were piling into equities over the last few weeks; I think that settles down and returns to normal, which will help the bond market.
The worry point: When it comes to TLT, the big concern is always going to be a rate hike, and the market still seems to be thinking that there might be one this year. I’m not expecting that.
The lack of inflation and GDP growth basically means that a Fed that is dependent on the data can’t raise interest rates into the teeth of things that could create a recession.
The play: TLT options, so long as the ETF is holding above $126, the level it has held on this most recent dip. I started my position on Friday (Sept. 15) with Oct. 6 $126 calls, and will be looking to add to my 200 contracts.
I expect TLT to make a new high by the end of the year, meaning something around $130. That’s not happening right away, but the move I am anticipating right now is short-term for a few bucks to the upside, enough to put my options in good shape and a start toward that move higher that should run the rest of the year.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using leveraged ETFs. At the time this was published on RagingBull.com, he held 200 Oct. 6 $126 call options on TLT, and was planning to expand his position as described here. He has traded TLT often throughout 2017.