The US bond market was strong on Thursday, iShares 20+ Years Government Bond ETF (TLT) During the day, stocks posted their best gains in at least a month, with two less notable but equally important moves for bond bulls taking place in the options market.
A series of options are being bet on the stock market about an hour after the opening bell on Thursday. State Street Utilities Select Sector SPDR ETF (XLU) Transfer option trading volume within the fund was 10 times the 30-day average, according to CBOE LiveVol data and SpotGamma.
It centered around a $1 million trade that bet on whether the group’s decline would stop or even recover. Utilities have been hit hard as high-dividend sectors face increased competition for bond payments as bonds fall and interest rates rise.
Specifically, the trader sold 5,000 39-strike puts expiring in mid-January for $695,000 and sold the same amount of 42-strike calls expiring on the same day for $400,000. At the time of the transaction, XLU was trading just above $39, making it a bet that the maximum payout will be between $39 and $42 by expiration.
The trade is not an aggressive bet on utilities’ gains, but it does signal that some traders believe the sector’s decline is over and that interest rates may have hit a ceiling. Additionally, this represents the culmination of a week-long change in pace of options flow around this highly interest rate-sensitive sector, which is trading at a 30-day correlation to the 10-year Treasury yield of -0.94, according to ThinkOrSwim.
State Street Utilities Select Sector SPDR ETF (XLU) Year-to-date
Volume of puts to calls peaked late last month at a ratio of 2.67, the highest level since May, but fell last week as traders shifted to calls, according to BarChart data. According to Spot Gamma, 74,000 calls were likely bought in Thursday’s trading, compared to just 4,500 puts.
Other bets showing the highest rate
Utilities trades weren’t the only under-the-radar option trades that signaled a slowdown in bond selling. Later that day, in the bond pit of the Chicago Mercantile Exchange, someone made a $4.4 million bond trade with short-term interest rates reversed.
According to a floor trader who shared the trade off the record, someone bought 100,000 contracts of SOFR futures (which were trading around 95.51 at the time) at a 96/96.12 call spread. It is certain that overnight interest rates will return to yields not seen since June.
“There was a lot of call buying today and a big trade ahead of tomorrow’s jobs report,” the trader said. “The 10-year interest rate exceeded 5.3% and then started to rise.”
