Throughout most of 2014, the trade to make in U.S. bonds was from the long side (even in the first two weeks of this year), but now the trade is starting to get crowded in the near-term. The bid to cover ratio of Wednesday’s $13B 30-year bond auction was 2.32 vs the average of 2.49 (December’s high was 2.76). This reflects a weakening demand for long-dated treasuries.

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Looking at the two-year weekly candlestick chart above, we can see that the iShares Barclays 20+ Year Treasury Bond Fund ETF (TLT) is now testing the top of the uptrending channel and on pace to close above the upper Bollinger Band for the second straight week. The RSI is expressing this extreme buying pressure at a 77+ reading, making it the most overbought in the last two years.

The long-term uptrend does remain intact in the TLT. However, in the short-term, it is likely to pullback to mid to high $120’s ($127.00-$127.50 being a retest of the January breakout level). To effectively manage risk trading from the short side, consider using a stop loss reference just above the $135 level (reward/risk ratio above 2:1).

Unusual Options Activity

On January 14th, someone put on the TLT Feb 20 $123/$128 bear put spread on 40,000 times for a $0.58 debit. This trade costs $2.32M for him/her to put on (possible rollout from the $123 puts to the $128 puts based on the open interest). The put to call ratio was 3:1 and put activity was more than 5x the average daily volume.

The Trade

  • Buy the Feb 20 $127/$133 bear put spread for a $2.40 debit or better
  • (Buy the Feb 20 $133 put and sell the Feb 20 $127 put, all in one trade)
  • Stop loss- $0.95
  • 1st upside target- $130 in the underlying’s price
  • 2nd upside target- $127.50 in the underlying’s price

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To get Mitchell’s Unusual Options Activity Report featuring a bear put spread in Capital One Financial (COF), please click here.