Here’s a good example of the many options trading investors now turning to bonds and bond exchange-traded funds as the stock market meanders.
This morning, a trader took out a very short-term position in the iShares Barclays 20 Year Treasury Bond Fund (NYSE: TLT), looking to pick up a small premium as expiration hits.
More than 10,000 TLT May 94 Puts traded this morning, doubling the previous open interest of 4,986, so these include new opening positions. Almost all of the options changed hands in just a few minutes and were apparently sold, with the largest print of 7,778 going for $0.10. The May strikes expire tomorrow.
TLT is down another 44% on the day to $94.89. The fund, which is up from $90 in the last month, closed Tuesday at $96.59 before falling sharply yesterday.
We don’t see this trading done against any positions in the underlying fund, so it appears to be a straight put sale. The trader is looking to collect that small premium that is left in the options before they expire.
The position collects the $0.10 premium but risks much more if the TLT continues to fall sharply. The probability of that happening is low, but it is the reason that some call this type of strategy “picking up nickels in front of a steamroller.”
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