Options Tuesday: Let’s Play the Bond Market Rally

Shah Gilani|April 20, 2021

For this week’s Options Tuesday, we’re playing the bond market rally.

You know, the rally that, in just ten days, took the 10-Year Treasury from a 1.79% yield to 1.54%

The bond market rally that crescendoed last week right when economic data showed the fewest new unemployment claims since March, and retail sales skyrocketed 9.8%

That bond market rally.

The one that didn’t make sense. Because it doesn’t make sense that rates would fall after they’d been rising on inflation fears, on fears the economy was actually heating up, that sales were rebounding dramatically, that unemployment would be falling. But all that happened, and bonds rallied!

I’ll tell you why that happened. Bonds rallied when they should have sold off because there were massive short-bets against bonds and traders betting rates were going to continue to rise and prices would keep falling had to cover their wrong-way wagers.

That’s what caused bonds to rally last week in the face of economic news and record-setting equity market benchmarks doing what they’ve been doing, making new records.

The bond market rally probably has got a little more to go because there are still shorts that haven’t been covered and because equities started the week off on the wrong foot.

But the bond really isn’t going to last if equities keep going higher and economic data gets better and earnings keep exploding higher.

Once the short covering is done the rally will turn tail and bond prices will start turning down again.

And I’ve got a great way to play that prospect.

The ProShares UltraShort 20+ Year Treasury (NYSEAcra:TBT) is an inverse 2X leveraged ETF that goes up in price when bond prices go down. In fact, because it leverages 2X it goes up twice as much (on a percentage basis) as the bond index it tracks goes down. It’s a fun trading instrument.

TBT’s trading around $20.68 as I write this. When the 10-year Treasury was pushing a yield of almost 1.8% TBT was trading at its 52-week high of $22.60.

I’m willing to bet yields are going back up and TBT will see $22.60 again, and probably make new highs north of $23.

If that happens, you want to own some TBT.

I like the May 21, 2021 expiration $22 strike price calls, trading around $0.29 per share. If you want to trade this option, look for the options chain TBT210521C00022000.

That gives you more than a month for interest rates to start backing up.

And, if TBT gets to $23 by expiration, your $22 strike calls will be worth at least $1.00 per share. If you paid 29 cents for them, you’d have a nice 250% gain.

Because there’s always risk in every play, especially trading leveraged ETFs, I’d recommend exiting the position if the calls trade below $0.14. That would be a near 50% loss, but manageable if you don’t throw too much money at this cheap play to make 250%.

Happy trading!

Shah