OptionsHouse

Options Trading News

December 20, 2013  Fri 12:23 PM CT

HYG: SEE CHART GET CHAIN FIND STRATEGIES
One big investor is looking for junk bonds to stay strong next year even with interest rates pushing higher.

optionMONSTER's Heat Seeker monitoring program detected a massive three-way bullish trade in the iShares iBoxx High-Yield Corporate Bond exchange-traded fund. It involved the purchase of 13,000 March 94 calls for $0.45 and the sale of equal amounts of March 90 puts for $0.90 and March 95 calls for $0.10. Volume exceeded open interest at all three strikes.

The trader collects a credit of $0.55 and stands to earn an additional $1 if the fund closes at or above $95 on expiration. They're on the hook to buy it on a drop to $90 because of the short puts, and they'll start losing money under $89.45. (See our Education section)

The HYG is off 0.11 percent to $92.95 in afternoon trading. The fund declined sharply in May and June as investors worried about rising interest rates, but it has slowly worked its way higher since.

The Federal Reserve finally resolved some of those fears this week by slowing the pace of its fixed-income bond purchases. Nonetheless, junk bonds are closely correlated to equity prices, so the same improving economy that allowed the Fed to taper could also support high yield.

It's also noteworthy that puts are much more expensive in the HYG than calls because it's prone to fall after monthly dividends are paid. Selling them lets the investor profit from the fund's rich payouts without ever owning it directly.

Total option volume was quadruple the daily average, according to the Heat Seeker.
Share this article with your friends


Related Stories

HYG

Downside play in high-yield bonds

January 29, 2015

A near-term downside play is dominating today's option activity in the iShares High-Yield Bond Fund, which tends to have a high correlation with the S&P 500.

HYG

Big hedge in high-yield bond fund

January 9, 2015

The iShares High-Yield Bond Fund saw a large put roll yesterday that appears to be a protective hedge on long shares.

Invest Like a Monster - Las Vegas: March 13-14

Premium Services

Archived Webinar

Option Money Machine Winter Classic

Education & Strategy

The rolling technique

In the January 7th edition of Advantage Point, we initiated the purchase of a second week-out GOOGL 535 put at...

View more education articles »