One Option Trader Betting Over $5 Million Dollars That Bond Prices Will Drop

If you think the majority of option traders know what they’re
doing, including one that bet over $5,000,000, you may want
to consider purchasing some put options on the TLT ETF (the
iShares Barclays 20+ Year Treasury Bond fund).

The following article from Reuters talks about how the Fed
doesn’t appear to be planning to purchase bonds to boost the
economy again. This sent bond prices tumbling. Obviously,
most option traders expect the decline to continue.

Option players appear to be betting on higher U.S. Treasury
yields as Federal Reserve policymakers appear less likely
to add more monetary stimulus to keep short term interest
rates low.

Options volume this week was heavily tilted in favor of put
options in the iShares Barclays 20+ Year Treasury Bond fund,
or TLT while call turnover increased in the Proshares
UltraShort 20+ Year Treasury Fund. The activity in both
suggest that investors are positioning for higher long-dated

Minutes from the Federal Reserve’s March policy meeting
released Tuesday suggested fewer Fed policymakers felt the need
for more bond purchases soon to bolster the U.S. economy than
back in January. This led to a broad market sell-off on Wall
Street with prices of the 30-year Treasury bond falling more
than one full point.

On Thursday, 30-year Treasury prices gained 19/32 to drop
the yield to 3.32 percent. T he yield on the 30-year closed at
3.48 percent on March 19, which was the highest since September

“We have seen a lot of put buying on TLT and call buying on
TBT,” said Joe Bell, senior equity analyst at options research
firm Schaeffer’s Investment Research.

“This may be due to expectations that interest rates could
be raised sooner rather than later,” Bell said. “It also could
be speculation that the prices of 20-year Treasuries have
reached a top and will decline from here.”

This week 307,000 puts and 92,000 calls have changed hands
in the TLT while 283,000 calls and 45,000 puts traded in the
TBT, according to options analytics firm Trade Alert.

The TLT is an exchange-traded fund that tracks the long end
of the Treasury yield curve. Investors often use equity puts,
allowing them to sell the shares at a fixed price any time up
until expiration, to guard against downside market risk.

In this case, when TLT fund loses value, bond prices are
falling and yields are rising. So buying a put on the TLT is
another way to bet on higher long-term rates.

Shares of the TLT rose 0.71 percent to $112.91 and its
option turnover consisted of 61,000 puts and 23,000 calls.

By contrast, the TBT is an ETF that gains when long-term
Treasury bonds fall. The TBT’s daily performance is intended to
double the opposite of Barclays Capital 20+ Year U.S. Treasury
Bond Index, which tracks the daily return of long-term

The fund moves 2 times the inverse to TLT, thus buying a
call – a contract which conveys the right to buy shares at a
fixed price – is a bearish view on bonds. The TBT ended Thursday
at $20.09, down 30 cents.

Joe Cusick, senior market analyst at online brokerage
OptionsXpress, noticed that on Thursday an investor bought a
block of 21,400 June $110 puts on the TLT for $2.42 per
contract. “The hefty premium purchase, of more than $5 million,
seems to reflect concerns about weakness in TLT,” he said.

“Since the fund holds a basket of longer-term Treasury
bonds, the put purchase seems to express the view that prices
will fall and yields will rise,” he said.

On Wednesday, Cusick also highlighted the trading of big put
spreads in the TLT, notably the July $95-$100 put spreads.

Later on Wednesday, a big call spread traded in the TBT.
An investor bought 52,000 April $21-$23 TBT call spreads for 31
cents looking for the fund to rise to $23 or better by April
expiration in two weeks, said options
strategist Frederic Ruffy.

Ruffy said “while the spread appears to be an aggressive
short-term bet against Treasurys, it’s possibly a position
adjustment.” More than 60,000 contracts traded in both strikes
and open interest was sufficient to cover.

Over the 10 trading sessions ended on Wednesday, investors
bought nearly three times more puts than calls in the TLT on
three U.S. options exchanges as fresh positions, according to
Schaeffer’s Investment Research. This put-to-call ratio is
higher than 98 percent of the readings taken over the past year.

In the TBT, the 10-day call-to-put ratio was 9.78 calls for
every put bought, Schaeffer’s data showed.

See Reuters for the entire article

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