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
, and they'll start losing money under $89.45. (See our
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
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
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.
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