Big TLT Put Purchase Bets On Big Decline

September 03, 2015

This is a weekly column focusing on ETF options by Scott Nations, a proprietary trader and financial engineer with about 20 years of experience in options.

Our bond market has been overlooked during the past two weeks thanks to volatility in equity ETFs. But the important question, the domestic question that is fueling our equity volatility, is when will the Federal Reserve start raising interest rates? That question impacts our bond market directly.

The iShares 20+ Year Treasury Bond ETF (TLT | A-85) focuses on the longest end of the yield curve by tracking U.S. Treasury bonds with remaining maturities of 20 years or more. Since longer maturity bonds are more sensitive to changes in interest rates, TLT is more volatile than ETFs that track shorter maturity bonds.

Has TLT Peaked?
You can see from the long-term chart that TLT rode the wave of Fed-induced lower interest rates and quantitative easing.

But now that the Fed has ended quantitative easing and appears ready to begin normalizing interest rates this year, TLT has come off its recent high of more than $136 per share, adjusted for distributions.

One large institutional option trader on Wednesday was looking to profit from further declines in TLT.

Our trader bought 4,400 of the TLT $120 strike put options expiring in January 2017. He paid $11.90 per share, or a total of $5.2 million, and he gets the right—but not the obligation—to sell 440,000 shares of TLT at $120 per share anytime between now and the expiration of these options in January 2017.

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