The Fed's decision on Wednesday to hike interest rates led bond yields soaring to their highest levels in years, sending bond prices lower, and one trader says the bond wreck isn't stopping here.
The 20-plus-year Treasury bond ETF (TLT) dropped following the Fed's rate hike announcement as well as its expectation that it will hike rates thrice in 2017.
"I think there's going to be more interest rate raises in the future, and that's why I think the TLT is going lower," Andrew Keene of AlphaShark said Wednesday on CNBC's "Trading Nation."
More specifically, Keene believes that TLT could actually drop another 7 percent or so points to $110. This is based on Keene's own observation that since the election, every time the TLT hits its 20-day moving average, the ETF then moves lower. If the trend continues, says the trader, then TLT will follow what looks to be a downward channel that could take it to $110.
Keene wants to buy a "bear put spread" in preparation for a move down in TLT. He is buying the March 114-strike puts and selling the March 110-strike puts for a total cost of $1, or $100 per options spread.
If TLT closes above $114 at expiration, Keene would lose the $100 he put down to make the trade. But if TLT were to close below $110 at March expiration, the spread will be worth $400, meaning that Keene will quadruple his money.
Trader takeaway: Keene believes more rate hikes are on the way, so he's buying the TLT March 114/110 bear put spread for $1.