How To Trade A Popular ETF When Direction Is Uncertain


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How To Trade A Popular ETF When Direction Is Uncertain

ETFS, INVESTING STRATEGIES, OPTIONS
 

Under normal circumstance, iShares 20+ Treasury Bond ETF (NASDAQ: TLT), isn’t the sort of ETF you’d expect to highlight because of its potential to move more than expected. Long bonds, which TLT replicates, are tied to interest rates. And interest rates don’t tend to move that much over short periods of time.

TLT still manages to trade just under 10 million shares a day on average with 80,000 options contracts to boot. But most of those trades probably aren’t betting on an increase in TLT volatility. I would venture an educated guess that TLT options trades are either based on lack of volatility (buy-writes for instance) or directional trades (like vertical spreads).

But here’s the thing…

The next couple months may actually be a good time to bet on movement in TLT – and you probably don’t want to pick a direction.

While the dynamics of bonds, interest rates, and the economy can be extremely complex at times, we can actually simplify two strong forces which could shift TLT up or down. The first one is increasing interest rates. The Fed recently made it clear the economy in the US is doing quite well and they don’t expect it to veer from that course anytime soon.

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