Complex bullish bet on junk bonds
David Russell | firstname.lastname@example.org
optionMONSTER's tracking systems detected a surge of volume in the SPDR Barclays High-Yield Fund, which holds a diversified mix of debt securities rated below investment grade. Almost all the activity occurred in the October and December expirations, with 4,000 contracts each trading in six different options.
The December 40 calls were purchased for $0.35, the December 39 puts were sold for $0.60 and the December 36 puts were bought for $0.20. The October 40 calls were sold for $0.10, while the 39 puts and 36 puts changed hands for $0.15 and $0.05. Volume was below open interest in October but not December, which suggests that a single trade was closed and rolled forward in time.
The trader is now essentially short the 39/36 put spread and long the 40 calls. Selling this vertical spread earns income to finance the upside call purchase. He or she stands to earn quick profits if the JNK rallies but also faces the risk of a $3 loss should the fund drop to $36. (See our Education section)
The JNK fell 0.16 percent to $39.85 yesterday and has mostly fluctuated between $39 and $42 all year. That could make some investors confident that it will hold the bottom of that range and help explain the put selling at that level.
Total option volume was 11 times greater than average in the session.