Big Printin’ – $HYG: High Yield High Wire

by Dan June 27, 2016 3:49 pm • Commentary

Our post Brexit investment world feels a lot like the downdraft we saw in early 2016 with currencies and credit showing strains, and the most severe downward pressure on equities and commodities.  The options activity in the high yield credit etf, HYG, caught my eye:

HYG: puts outnumbered calls 157,000 to 26,000 with put volume 4x average daily volume. Most of the volume coming in a few trades, two near term bearish trades and one trade that looked to be longer dated bullish.

The largest print of the day came shortly after the open at 10:13 am when the HYG was trading 82.76, it appears that 32,000 of the Dec 78 puts were sold to open at $2.  If this was the case then the trader would take in the $6.4 million in premium if the HYG is 78 or higher on Dec expiration, with the worst case being put 3.2 million shares at $78, but really at $76 when you account for the $2 in premium received.  Taking a quick look a the one year chart and you can see that $76 may be an important technical support:

[caption id="attachment_64655" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Shortly before 11am, when HYG was $82.76 there was an opening buyer of 31,000 of the Aug 81 puts for 1.35, or $4.19 million in premium. These puts break-even on Aug expiration down about 4% at $79.35.

And lastly just after 3pm, when HYG was $82.25, there was an opening buyer of the Aug 76 /79 /82 put butterfly, paying 70 cents for 10,000 x 20,000 x 10,000.  This trade breaks-even on Aug expiration at 81.30, with a max gain of 2.30 at 79.  The payout trails off between 79 and 76.70 with max loss of 70 cents below 76 or above 82.

A quick look at the chart above shows the importance near term of the 82 support level, which also corresponds with the etf’s 200 day moving average.

Lastly, prior to Thursday’s vote in the UK, options prices in the HYG were some of the cheapest on the board, with 30 day at the money implied volatility in single digits:

[caption id="attachment_64656" align="aligncenter" width="600"]HYG 1yr chart of 30 day at the money implied volatility from Bloomberg HYG 1yr chart of 30 day at the money implied volatility from Bloomberg[/caption] Volatility has since turned higher but it’s at levels well below what we saw in December ’15 (implied vol near 20) or the Summer of ’15 when it was 15. A spike towards 15 is probably next if we saw HYG unable to hold this support level. That means puts wouldn’t just benefit on deltas on a break below this level, but could get supercharged with implied volatility exploding on that breakdown.