Bearish spread in corporate bond fund

The HYG corporate-bond fund is not far off its 52-week highs, but a large three-way trade is looking for a pullback.

The iShares iBoxx High-Yield Bond ETF is up 0.17 percent to $90.87 today. The exchange-traded fund reached its 52-week high of $92.26 in late February and has since bounced off its 2012 low of $86.36 set on the first day of June.

The correlation between high-yield bonds and equities is usually quite high, now sitting at 0.86 between the HYG and the S&P 500, though down a bit over the last couple of days as stocks have sold off.

Today’s option activity is betting on the HYG following equities lower. More than 12,000 HYG options have changed hands so far, 3 times its daily average, while only one of those contracts is a call.

Virtually all of the volume is in a single butterfly spread.

A trader bought 3,000 each of the September 89 and 85 puts for $1.52 and $0.71 respectively. At the same time, the trader sold 6,000 September 87 puts for $0.99. The volume at all three strikes was more than open interest.

This trader is spending $0.25 to open the position, which is all that is at risk if shares are above $89 or below $85 at expiration. The maximum profit potential of $1.75 comes if the HYG is right around $87 by that time.

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— Option Monster

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