How to profit from interest rate changes in the short term

(This is a little late, but what the hey...)

If one thinks interest rates will go up (that is, falling bond prices), one can buy puts or sell calls on TLT ($86.71 on 4/3/2004), the iShares Lehman 20+ Treasury Fund. This exchange-traded fund tends to track the 10-year Treasury note (check iShares for more information).

Conversely, if one thinks yields will go down (rising bond prices), one can buy calls or sell puts on TLT, or even buy TLT itself.

Buying options is generally safer than selling them (short). Suppose someone had sold puts believing that there would be a bad job report (meaning the economic recovery would not be soon and consequently, the interest rates would stay low longer). The job report was good (meaning the economic recovery is likely to make interest rates go up sooner) and that person would be forced to cover his short put by buying TLT at a higher price (at a loss).

TLT $86.71 on 4/3/2004