Are Bonds Due for a Bounce?

Using iShares Barclays 20+ Yr Treas.Bond ETF (TLT) as proxy for Bonds, 2013 was not really a good year for TLT. In fact, it was the worst year since 2009 for US Bonds (30yrs). Gold also suffered its worst year in almost 20 years.

As 2014 starting to unfold, a common question is what’s ahead for Gold and Bond? From Bonds perspective, I think risk reward is favourable for a bullish set-up.

Though some may consider it as H&S price pattern (which is usually a bearish set-up). I view it as that consolidation is taking place and a Limited Risk/Limited Profit trade can be initiated with a well defined stop-loss.

This is how a trade can be set-up:

– Buy to Open Mar Call 102
– Sell to Open Mar Call 105
– Total debit : $1.17 +/-

This trade will have breakeven point at $103.16. The Maximum loss is $1.17 and maximum reward from this trade is $1.83 thus $1.56 gains for every $1 risk. However, we can use a stop loss at 101 i.e. if TLT drops to (or below) $101, exit the trade. Since this trade is using Mar’14 expiration cycle, it has about 77 days for it to work-out.

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Trading is all about probability. And I personally think that probability of TLT going higher is more vs. probability of going lower.

Disclaimer- I am NOT in this trade as of this writing. I might choose to get-in/out anytime.