Concern over the state of the high yield debt markets have been brought to the fore of late as the crash in commodity prices of the last year and half as caused some major stress in a large component of high yield debt issuance. News last week that high yield credit fund Third Avenue blocked redemptions while the fund liquidated its remaining holdings sent investors of all sorts running for cover, sending oil to seven year lows, the S&P 500 down 3% on the week, gold up, Treasury yields lower… a good ol’ fashioned risk-off week.
Options volume (orange line) and open interest (yellow line) have exploded to all time highs in the largest etf that tracks the high yield index, the IShares IBoxx etf (HYG):
Despite realized volatility (white line – how much the underlying is moving) not even at the highs of the year in HYG, the put buying in the etf of late has sent short dated implied volatility (blue line – the price of options) to levels not seen since the sovereign debt crisis in Europe back in 2011, when realized volatility was also much higher:
The 8 year chart below of the HYG shows the etf now approaching the 2011 lows, well above the lows reached during the financial crisis during 2008/09. What’s most evident is the massive pickup in volume over the last three years, suggesting that this product (or derivatives on it) has been used most likely as a hedging instrument:
With the etf at 52 week and multi-year lows options volumes ran hot today as one would expect, 6x average with put volume at 583,000 to 81,000 calls.
There were two large trades that caught my eye. The first right after the open when the etf was $79.20 a trader sold to close 40,000 Dec 77 puts at .40 to close and bought to open 40,000 Jan16 77 puts for 1.33 to open. This trade merely rolls out a bearish view a month.
The other came around 3pm. When the etf was $78.47, a trader bought to open 50,000 of the Jan16 74 puts for .85 to open, 95,000 of this strike traded on the day. This trade breaks-even at $73.15, down 6.8% from the level of HYG that it traded at.
Carl Icahn recently said the meltdown in high yield is just the beginning:
“The high-yield market is just a keg of dynamite that sooner or later will blow up,” he said on CNBC’s “Fast Money: Halftime Report.”
These put trades in HYG signal that market participants want the protection in case Icahn is correct.