Bulls pile into junk bonds a second day
David Russell | email@example.com
For the second time in as many days, optionMONSTER's Heat Seeker tracking system detected a bullish combination trade in the iShares iBoxx High-Yield Corporate Bond exchange-traded fund.
A block of 2,500 June 82 puts were sold for $0.40 and an equal number of June 92 calls were bought for $0.30. It resulted in a credit of $0.10 and will earn unlimited profits if HYG rallies over the next three months.
Like the activity yesterday, today's transaction is noteworthy because extremely high implied volatility pumped up the value of the puts. That let the investor get paid even though the short puts are much further from the money than the long calls. Under normal circumstances, the trade should have cost money, but it doesn't now because the market is pricing in a greater chance of a drop than a rally. (See our Education section)
HYG is up 0.27 percent to $90.71 in early afternoon trading and has grinding higher since October.
Junk bonds often forecast moves in equities because they are the most sensitive debt instruments to risk appetite and economic conditions. Last year, for instance, HYG foreshadowed the August selloff by about two months. Today's strength in the fund is also potentially bullish for the S&P 500.
Overall option volume is quadruple the daily average so far in the session.