Option Trade of the Day: iShares Barclays Aggregate Bond Fund (AGG)
The selling pressure continued in to Monday’s trading and the S&P has moved in to negative territory for 2018 now. After peaking on January 26, the index has now lost 7.79% and the volatility has shown no signs of letting up in the last few days.
The selloff has moved almost all stocks out of overbought territory and has put a good number of stocks in to oversold territory.[hana-code-insert name=’adsense-article’ /]This change has caused my scans to produce more bullish signals than bearish signals in the past few days, but I am not comfortable suggesting anymore calls at this point in time.
Another thing that has happened as a result of the selloff is that bonds are starting to catch a bid and a number of bond ETFs have appeared on the bullish list in the past few days.
That is why today’s trade idea involves the iShares Core U.S. Aggregate Bond ETF.
The fund seeks to replicate the Bloomberg Barclays U.S. Aggregate Bond Index. The index measures the performance of the total U.S. investment-grade bond market. The index includes investment-grade U.S. Treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, commercial mortgage-backed securities and asset-backed securities that are publicly offered for sale in the United States.
Because it is a bond ETF, the volatility is much lower than we see with stock ETFs. The bond market has been under a little pressure over the past few months, but now that we are seeing some selling in the stock market, the bond market is becoming more attractive as investors seek safety. We see on the chart of the AGG that the fund has been trending higher over the last few years and the lows have created a trendline that is just below the current level. We also see that the weekly stochastic readings have just made a bullish crossover and I should mention that the daily stochastic readings did the same thing.
Buy to open the March18 106 strike calls on AGG at $2.10 or better. These options expire on March 16. Because of the low volatility on the AGG, we only need the fund to move up 2.4% for this option to double. Even if the stock market bounces back, I look for investors to seek out less volatile investments for the coming weeks and bond ETFs are likely to bring in more buyers than sellers. This should lift the AGG in the weeks ahead.
— Rick Pendergraft
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