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Bond prices have run up during the past few weeks, as the euro zone troubles have driven investors to Treasurys as a safe haven. However, bonds have their own headwinds to contend with, and based on my analysis of resistance on the chart of the iShares Barclays 20+ Year Treasury Bond Fund (NYSE: ), I suspect their run is over. So I’m setting up a synthetic short position in TLT with support at $90 as my profit target.
I prefer to use TLT rather than a leveraged or inverted ETF, because those vehicles come with time value and compounding problems. With the trade below, I can hold the position and roll it out if I need to without incurring a lot of costs.
Trade
Buy to open (BTO) TLT Jan 97 Puts
Sell to open (STO)
TLT Jan 98 Calls
Target Entry Price
I set a limit order, which was just filled as I write this, for a 5-cent credit, so there wasn’t really a “cost” to enter the position. However, I will need to post 20 times the strike price of the short call as margin, so I technically have about $2,000 invested per contract.
Risk/Reward
If TLT goes above $102, I will close the trade. Assuming that is my worst-case scenario, I have a between a 1:2 and 1:3 risk-to-reward ratio.
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