Bond ETF Unusual Option Activity Report
As market makers were deliberating what price to open DoorDash Inc (NYSE: DASH) this morning, the bond market was giving a much different signal. Bond ETFs were seeing significant bearish option interest across corporate and U.S. Treasuries. The exuberance for IPOs has been nothing short of historic and the amount of debt built in the system has never been higher. Now what?
The Federal Reserve is at the center of this bubble and the Federal Government has failed to deliver any direct stimulus. We’re at a crossroads where the market could head lower, and the skittishness of the bond market is something that investors should take note of.
Bonds ETF Option Activity
There are two things that is really interesting about today’s activity in bond ETFs. First, the activity wasn’t just on corporate credit, but also Treasuries. Second, the mismatch in expirations is emphasizing the near-term risk to the market.
Here’s a breakdown of the activity:
- iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG): 112,713 contracts
- $86 puts for 31 DEC 20 BOT @ $0.50
- $83 puts for 31 DEC 20 sold @ $0.13
- iShares iBoxx Inv Grade Corporate Bond ETF (NYSEARCA: LQD): 57,058 contracts
- $134 puts for 19 FEB 21 BOT @ $1.26
- $131 puts for 19 FEB 21 sold @ $0.71
- $140 calls for 19 FEB sold @ $0.35
- iShares 20 Plus Year Treasury Bond ETF (NASDAQ: TLT): 15,000 contracts
- $150 put for 19 MAR 21 BOT @ $2.65
- $145 puts for 19 MAR 21 sold @ $1.55
Firstly, HYG was a sizable long put vertical trade placed for $0.37. It has a breakeven of $85.63 and a maximum gain of $2.63 per share. The maximum gain occurs if the price closes below $83 by expiration.
Next, the trade on LQD is a bearish combination trade for a net debit of $0.20. The trade used the sale of the short call to help pay for the long put vertical, for instance. The vertical has a breakeven of $82.80 and a maximum gain of $2.80 per share, in this trade. The maximum gain is achieved if the price closes below $131 by expiration on February 19.
Finally, the TLT trade was a long put vertical with a $1.10 debit. This trade has a breakeven of $148.90 and a max gain of $3.90 per share. The max gain is achieved if the price closes below $145 by expiration on March 19.
What to Expect from Bonds?
As you look at these bond products, HYG is the most correlated with the stock market as a junk bond ETF. The trade that was made would point to more downside risk in the near-term, which is more bearish for the market as a whole.
If there is a correction in risk assets, typically Treasuries, represented by TLT, will perform well. However, the potential policy response could see the bullish trend in Treasuries reverse, similar to March.
Looking at LQD, this gets interesting. This is because a rise in Treasury yields will cause LQD to sell-off as well. Because the risk spread is compressed, a rise in the risk-free rate will push corporate investment grade bond yields higher, prices lower as well. However, if Treasuries are bid amidst market weakness, LQD will also typically fall in price as the risk spread is widened.
Bond Market Technicals
Junk bonds (HYG) is currently testing its resistance from November 9 as the price gapped and sold off. In this case, the indication from the strike selection at $83 is a retest of the lower end of its previous trading range.
Corporate investment grade bonds (LQD) are pricing in a potential move below October support to $131.
For instance, U.S. long-term Treasury bonds (TLT) are pricing in the potential of a whipsaw similar to the Corona Crash.
Conclusion
Today's option activity on these bond ETFs is really interesting and may be giving a major signal to the market as a whole. Because this activity is unusual and is pointing to potential downside in risk assets heading in the end of 2020. Seems like a fitting end to a very unusual and volatile year.
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