HYG Options Traders Eye Big Moves After March Fed Meeting

The Federal Open Market Committee (FOMC) will host its March policy setting meeting Tuesday and Wednesday

Mar 8, 2017 at 3:17 PM
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Calls are the options of choice on the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) this afternoon. At last check, the exchange-traded fund (ETF), which proxies a market-weighted index of domestic high-yield debt -- mostly within the industrial sector -- has seen more than 61,700 calls cross the tape, or three times what's typically seen at this point in the trading session and nearly two times the number of puts. Although the shares of HYG were last seen down 0.4% at $86.83, one options trader in particular is betting on a big move higher by next Friday's close -- a time frame that includes next week's rate decision from the Federal Reserve.

Specifically, HYG's most active option by a mile is the March 90 call, where one block of 46,000 contracts was bought to open earlier, according to Trade-Alert. The trader paid $92,000 to initiate the trade (number of contracts * $0.02 premium * 100 shares per contract), which also represents the maximum risk, should the calls expire out of the money at next Friday's close. Profit, meanwhile, will accumulate on a move north of breakeven at $90.02 (strike plus premium paid). The options market is giving the calls a slim chance of being in the money at expiration, with delta last seen at 0.02.

Widening the sentiment scope reveals options traders have shown a preference for long puts over calls at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in recent weeks. Specifically, speculative players have bought to open 27,969 puts on HYG during the past 10 trading days, compared to 4,424 calls. Echoing this put-heavy backdrop is the ETF's Schaeffer's put/call open interest ratio (SOIR) of 3.89 -- in the 76th annual percentile. In other words, short-term speculators are more put-skewed than usual toward HYG.

Diving deeper, the bulk of this activity has centered on the front-month series, as well. Specifically, the March 95 call and put are home to peak HYG open interest, with roughly 117,900 contracts currently open at each strike. It appears as if at least one options trader used these options to initiate a long straddle, betting on a big price swing by next Friday's close -- regardless of direction. Next up is the ETF's March 86 put, where 106,138 contracts reside. Data from the major options exchanges confirms buy-to-open activity, meaning these speculators are eyeing a move south of $86 by March options expiration.

Looking at the charts, HYG hasn't traded below $86 since mid-December -- when the ETF sold off after the Fed raised interest rates. In fact, the shares have been charting a path higher over the last 12 months, up 8%. And while the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has recently pulled back after notching an annual high of $88.37 on Feb. 28, it appears to have found a foothold atop its 80-day moving average, which ushered the shares higher throughout most of 2016.

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