On Thursday, as the U.S. bond market strengthened, iShares 20-year and longer U.S. Treasury bonds ETF ( TLT ) recorded their best intraday rebound in at least a month. In two corners of the options market, there were also some less noticeable but equally important moves for bond bulls.
In the stock market, about an hour after the opening on Thursday, a series of options bets surrounding the Dow Jones Utilities Select Sector SPDR Fund (XLU) caused the options trading volume of this fund to reach 10 times the 30-day average. This information is provided by CBOE LiveVol data and SpotGamma.
These transactions revolved around a bet of $1 million, with the wager being that the utilities sector would not continue to decline but would even start to rebound. As bond prices fell and interest rates rose, utilities stocks have been severely hit, as the dividends from this high-dividend sector face greater competition from fixed-income assets.
Specifically, a trader sold 5,000 put options with an expiration date in mid-January and an exercise price of $39, earning $695,000; at the same time, they also sold the same number of call options with the same expiration date but an exercise price of $42, earning $400,000. At the time of the transaction, the stock price of XLU was slightly above $39, which means that the maximum return range at expiration would be between $39 and $42.
Although this trade is not a radical bet on a sharp rise in the utilities sector, it indicates that some traders believe that the sector may have hit bottom, and interest rates may also have peaked. Additionally, this is also the result of a week-long change in options capital flows surrounding this sector, which is highly sensitive to interest rates. According to ThinkOrSwim data, the 30-day correlation coefficient between XLU and the yield of 10-year U.S. Treasury bonds is negative 0.94.
Barchart Data shows that the ratio of put option trading volume to call option trading volume rose to 2.67 at the end of last month, the highest level since May, before falling last week as traders began to shift their preference to call options. SpotGamma It is reported that during trading hours on Thursday, approximately 74,000 call options were bought, while only 4,500 put options were traded.
Other bets suggesting that interest rates have peaked
This utility transaction is not the only low-profile options trade that suggests a slowdown in bond selling. Later on the same day, within the bond trading floor of the Chicago Mercantile Exchange, someone placed a trade worth $4.4 million, betting that short-term interest rates would reverse.
A trader present shared this transaction privately, stating that someone bought 100,000 contracts of the SOFR futures contract, which expires in March with a price expectation increase of 96/96.12. At that time, the trading price of these contracts was around 95.51. This was a bet that overnight interest rates would fall back to yield levels not seen since June.
This trader said, "There was a very strong bullish buying sentiment today, and trading volume here was also high before tomorrow's employment report is released. The 10-year yield once rose above 5.3%, after which there was a rebound."
