HYG Update – Must Yield

by Dan August 22, 2016 2:19 pm • Trade Updates

Towards the end of July we took a look at the HYG, the iShares high yield corporate bond etf. At the time, HYG had been in a very tight consolidation around $86. Here was the original trade idea from July 22nd:

*HYG ($86.08) Buy Aug / Oct 84 Put Calendar for $1.20
  • Sell to open 1 Aug 84 put at 25 cents
  • Buy to open 1 Oct 84 put for $1.45

What we had hope to happen was for HYG to creep lower towards our chosen strike into August expiration at which point we could roll the short put and keep the short delta bias while cutting premium outlay into October. Shortly after putting on the trade we did get that move, but it was very brief and bounced off of technical support at its 50 day moving average. And now the etf is back above where we entered the trade:

Screen Shot 2016-08-22 at 11.55.41 AM
6 month HYG from LiveVol Pro

The short August 85 puts expired worthless, but the long October 84 puts have lost on both delta and decay. So with the etf now 86.50, the October 84 puts are naked and worth about 0.55.

So what do we do with this trade?

If we could start fresh today on this we’d likely keep the same bias, but the position would look very different, with perhaps an 86/82 put spread. Being left with the 84 puts with the stock higher than our entry is not ideal. And without much to do to reduce the risk (for instance, the Sept 84 puts are just 10c, so not much of an opportunity to roll) we’re just going to take our medicine and close this and look for a better entry and better structure to capture a move lower like the one we saw briefly after we first put on the trade.

Action- Sell to close the HYG (86.50) October 84 puts at .55 for a .65 loss