Explore Your Options by Tom Gentile
TRADING THE “EASING” OF QUANTITATIVE EASING
Ever since former Federal Reserve chair-man Ben Bernanke and company made the ultimate decision to begin pulling back on bond purchasing last year, Treasury bonds have taken a beating. In the last six months of 2013, bonds dropped some 20% while interest rates rose during the same time frame. Many traders are speculating on a continued drop after the brief runup at the beginning of this year. A question I have been getting lately is, “How can an equity option trader take advantage of this move in the fixed in-come markets?” There are plenty of stock option traders who have no idea that trading the bond market is right in their backyard. Yes, when the subject of trading bonds comes up, most people think of the futures mar-kets, but it’s possible to take advantage of a bond rally (or drop) using an exchange traded fund (ETF) that is made up of bonds. When I am not following the futures markets, I turn to TLT, the iShares 20-year bond ETF. This ETF closely tracks the US Treasury bond market, meaning it correlates to the moves — both up and down — very well.