By Larry Benedict, editor, Trading With Larry Benedict
Rapidly rising interest rates last year saw the value of bonds take a massive hit.
The iShares 20 Plus Year Treasury Bond ETF (TLT) plunged nearly 40% from the start of 2022 until it bottomed out in October.
But it overshot to the downside. TLT bounced 18% off those lows in a little over a month. That rally evaporated just as quickly… And TLT again reversed lower.
Since then, TLT has been trading in a tight sideways range.
This pattern might be off-putting for some traders. But using just a small move within this band, we generated a 56.5% gain for members of my Opportunistic Trader options advisory.
And today, I want to show how we did it…
Rangebound Chart and Yields
On the left-hand side of the chart below, you can see where TLT bottomed out last October (‘A’)… And the Relative Strength Index (RSI) formed a ‘V’ and rallied (left red line) from oversold territory (lower gray dashed line).
TLT’s rally gathered momentum as the RSI moved higher into the upper part of its range. Note how the pattern where TLT rallied as the RSI moved higher has repeated (the other lower red lines)…
Invesco Currency Shares Swiss Franc Trust ETF (FXF) – Weekly Chart
Source: eSignal
Then TLT’s rally peaked and reversed with the opposite pattern at ‘B’…
So, when the RSI formed an inverse ‘V’ and trended lower, TLT reversed and fell. From there, TLT transitioned into a narrow sideways pattern.
But it wasn’t just the TLT stock price that was stuck in this rangebound pattern…
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Treasury yields had also fallen sharply to around 3.5% off the back of the March banking crisis (sparked by regional bank collapses like Signature and Silicon Valley Banks).
Although these yields recovered, they were unable to budge above 3.8% where they repeatedly ran into resistance.
So, when the RSI showed rising buying momentum (right red line)… and yields likely to mean revert from the upper end of their range (resistance)… That’s when we entered a long position in TLT with a call option on April 19.
Note that a call option increases in value when the underlying stock goes up.
And that’s exactly what we saw…
The trade went our way from the moment we opened our position.
So, with our position well up and yields down to around 3.65% from the 3.8% when we bought it, we sold our call option, exiting the position on April 25.
Although yields had the potential to fall further, we didn’t want to risk our profits with the FOMC meeting just days away at that point.
And all up, we generated a 56.5% gain in less than a week.
To be clear, we generated this profit by using options. Options enable us to leverage our position, so we generated a higher return than we would have if we’d bought TLT shares instead.
Remember options have a finite life… And the clock is always ticking.
But this trade shows that with the right strategy… and waiting for a strong set up… we can generate outsized gains in a short period of time.
And you can generate some handy gains even when a stock (or the market) is stuck in a tight sideways pattern.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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