{"id":59405,"date":"2022-04-09T13:50:18","date_gmt":"2022-04-09T20:50:18","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=59405"},"modified":"2022-04-09T13:56:52","modified_gmt":"2022-04-09T20:56:52","slug":"trading-around-soaring-interest-rates","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2022\/04\/09\/trading-around-soaring-interest-rates\/","title":{"rendered":"Trading Around Soaring Interest Rates"},"content":{"rendered":"\n

In “Jim Bianco: \u201cArguably One of the Worst Forecasts In Fed\u00a0History’<\/a>” I wrote about the prospects of trading soaring interest rates with the iShares 20+ Year Treasury Bond ETF (TLT). I have recently and belatedly faded rallies in TLT by buying puts and taking small profits on the way back down. (TLT goes up when rates go down and vice versa). It occurred to me that sentiment about rates will likely get to an extreme. At that point, I want to get contrarian in the spirit of my Above the 50 trading rules<\/a>. After all, soaring interest rates increasingly raise the specter of a recession. Slowing growth drives investors into the “relative safety” of bonds. Per the chart below the 2018 lows looks like a good place to consider going long off a bounce. The 2013 lows offer an even better entry point. <\/p>\n\n\n\n

\"The<\/a>
The iShares 20+ Year Treasury Bond ETF<\/a> (TLT) closed the week at a near 3-year low and looks set to eventually test the 2018 lows.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

A Trade on Soaring Interest Rates<\/strong><\/h2>\n\n\n\n

On Friday, CNBC’s Options Action discussed a brilliant idea for trading both directional ideas at once. Michael Khouw proposed what is called a “ratio spread<\/a>” with the TLT 2018 lows and high options premiums in mind. Khouw’s setup goes long 1 June $120 TLT put for every 2 June $114 TLT puts sold. At Friday’s prices, this position cost a minimal $0.31 while offering $5.69 in maximum profit potential. I like this setup because the worst case scenario means going long TLT at a discount right around the 2018 lows. If TLT rallies from here, I get a fresh opportunity to fade TLT. The odds are decent for a near-term bounce given TLT is currently testing its uptrend dating back to the financial crisis lows (Carter Worth provided a chart in the video clip below).<\/p>\n\n\n\n

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More opportunity in the 20+ Treasury Bond ETF?

Despite the bearish activity, Prof. @Michael_Khouw<\/a> says buying a put ratio could be the key to the trade. @CarterBWorth<\/a> breaks it down with two charts $TLT<\/a> pic.twitter.com\/YHPKCMPIua<\/a><\/p>— Options Action (@OptionsAction) April 8, 2022<\/a><\/blockquote>