Will 30 year Treasury bond fund, TLT continue its uptrend in 2012?

 Investors chasing performance, tend to push an expensive stock or asset even higher and in fear of even loosing more, tend to push a cheaper stock or asset even lower. It is like mass hysteria.  This mass hysteria coupled with investors trying to find safe haven in dollar from euro mess, global recession and currency devaluations in emerging markets, has pushed TLT to new heights. TLT had a phenomenal run in 2011, returning almost 30% and is trading today at $119.50.

   Past performance of TLT shows that it mostly found the floor at $85 and topped around $95 for several years, with only exception being 2008. It broke the upper range in 2008 and returned almost 25% only to give up all the gains next year.

   If global economy led by china does not go into recession, or euro does not blow up as expected or US economy shows growth, investors will flee this bond fund pushing it back to normal levels. It would hurt loosing more than 15% trying to chase a 3.38% yield.

How to trade?

   For those wanting to bet on the downside of TLT can look into buying put spreads or butterfly for cheaper trade.  Following is an example of TLT butterfly put spread costing today around $1.50.

Buy 1 Jan 2013 105 put

Sell 2 Jan 2013 95 puts

Buy 1 Jan 2013 85 put

  In the above trade, if TLT is trading between $86.50 and $103.50 by options expiration date, trade will be profitable. Maximum possible profit is $10.00 if TLT is trading at $95. Maximum loss on trade is $1.50 if TLT is trading outside the range of $85 and $105 on options expiration date.

Disclaimer: This article is not an individual investment advice, it is only for entertainment.

Source: Yahoo Finance.

Disclosure: I do not own any position in TLT. Do not plan on initiating any position in the next 72 hours