JNK Longs Draw Their Line In The Sand

As equity markets sold off last Tuesday, options volume surged to its highest level of 2017 to date. According to the Options Clearing Corporation (OCC), some 23.7 million contracts were traded during the session, and more than 12 million of those were puts -- the highest levels for both metrics since Nov. 10.

Among the instruments to experience a surge in put volume on March 21 was the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). The "junk bond" tracker recorded put volume of about 30,000 contracts last Tuesday -- absolutely dwarfing its average daily volume of 910 puts. The vast majority of that volume was concentrated at the June 35 put, where upwards of 25,700 contracts were added to open interest, and indications suggest that these June 35 puts were bought to open.

This fresh crop of puts accounts for some 92% of the total open interest at JNK's June 35 put, which is now clearly established as the fund's top open interest strike (outpacing the "runner-up" April 38 put by nearly 21,200 contracts).

This flood of put volume on JNK served as a rather emphatic punctuation mark on what has been a month of heavy net outflows for the fund, totaling more than $1.24 billion since the beginning of March (per etf.com). JNK shares were off 1.9% month-to-date as of Friday's close, having recently retreated to their 200-day moving average, as reflected on the accompanying chart.

And while JNK's 2017 lows have so far been concentrated around $36.20, the suddenly popular 35 strike squares with some of the ETF's previous significant lows -- including $35.03 during the May 2010 "flash crash" and $35.05 amid the post-election November 2016 surge in stocks. This raises the strong possibility that the JNK June 35 puts were purchased as hedges by those who are long the junk bond proxy, in order to limit losses (or protect paper profits) should the fund break below this historically important level.

If these likely hedges are still open (and still out of the money) as June expiration draws closer, these 35-strike puts could exert a "magnetic" pull on shares of the fund. In the meantime, traders will want to note that, amid massive net outflows for JNK, the remaining longs appear to have drawn their "line in the sand" at $35. In the weeks ahead, a breach of this level could result in an "all bets are off" situation for the ETF.