Bonds are hotter than a pistol right now. Spectators seeking a culprit for the sudden surge have many catalysts to choose from. There’s the trade war, Trump’s tariff rampage, a downshifting economy starting to be priced in, and a stock market that has completely lost its mojo.

As discussed at length in the Bear Market Survival Guide, U.S. Treasury Bonds are the ultimate safe haven vehicle, beckoning to one and all looking for a shelter from the storm.

But it seems like things are getting a bit overdone here. The go-to ETF for long-term treasuries is TLT. If you prefer a futures contract, then use /ZB. Take a gander at TLT and tell me it’s not overbought. You can’t can you?

It’s downright parabolic. And it doesn’t take a genius to figure out the rate of ascent is simply unsustainable. At this rate, interest rates or yields (which move opposite bond prices) will be at zero by Christmas.

AIN’T GONNA HAPPEN.

My inner contrarian is itching to bet on bonds not continuing the rocket ship rise. I call this chart setup a parabolic short.

The Inflated Balloon

And then there’s implied volatility which is climbing alongside TLT. With Friday’s jump, the implied volatility rank has risen to its highest reading of the year at 66%. That means options sellers are receiving more compensation than at any time over the past six month.

A premium sellers dream?

Maybe.

Remember, the higher the implied volatility, the farther OTM you can go to sell options. That provides a wider profit range and thus a higher probability of profit.

Let’s explore two ways a trader might try to capitalize on this particular pattern. These are examples only.

The Bear Call

The simplest way to bet on TLT finally pausing or pulling back is to sell OTM calls. Instead of selling them naked, however, use bear call spreads to better control the risk and cost. You’ll score a better return on investment.

For instance, you could sell the June $135/$139 bear call for 47 cents. Consider it a wager that TLT will sit below $135 roughly two weeks from now. If it does, the calls will expire allowing you to pocket the 47 cents. The initial risk/cost is $4.53, so the reward translates into a potential return of 10.4%.

To increase your odds, you might consider scaling-in. For the second and third tier, I’d shoot for 71 cents and 95 cents or so.

Fly Condor, Fly

The quickest way to profit with the bear call is if TLT finally pulls back. If you think it’s more likely that it will move sideways, then you could sell iron condors instead. It exploits the high implied volatility, but in a way that sidesteps guessing direction.

I’m not a huge fan of selling two-week condors, so I’d prefer to use July options for this example. Suppose we sell the July 138/142 bear call and the 128/124 bull put for a net credit of 84 cents.

The max reward of 84 cents is ours to keep if TLT sits between $128 and $138 at expiration. Since the max loss is $4.16, we’re looking at a potential return on investment of 20%.

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