This Is The Biggest Options Trade Ever Made

| July 21, 2017 | 0 Comments

optionsRisking $10 million on a trade that has a 9-day time limit might seem ludacris, but that’s exactly what this trader did. The best part is, you don’t need to have millions of dollars to profit from the same type of trade. Jay Soloff explains how. 

It’s easy to see the benefits of trading options in a variety of situations. They are numerous and easy to understand. You generally don’t have to try very hard to convince someone of the value of leverage and limited risk, for instance.

But the options market is valuable for other reasons as well. Big traders and institutions (what we generally refer to as the “smart” money) use the options market frequently for some of their most important strategies. When you see a huge options trade hit the wire, it’s generally going to be a smart money source.

Why is that important? Well, if you can drop several hundred thousand or even several million on a limited duration trade, your (assumingly) robust resources must be suggesting this trade is going to pay off. If savvy investors can figure out what the strategy is by looking at the trade, they can raise their own probability of success by making a similar trade. In fact, there’s no reason you can’t copy the trade directly if you want to go that route.

Keep in mind, the goals of big money trades may not be the same as your own. Some institutions may be using options as a hedge against a huge position in stocks, for example. In that case, the options trade is a low probability trade and you don’t want to emulate it.

In other words, it’s important to do your research and at least make a reasonable guess as to what the underlying strategy is. Sometimes it’s obvious what the trader is trying to accomplish. Other times, you need to make some assumptions.

Well, we recently had a trade that didn’t just hit the wire – it made national news. It’s not often that options trades make Bloomberg headlines. That’s how big this trade was.  In fact, it may be the biggest of this kind of trade ever to be recorded. Now that’s the sort of trade we want to pay attention to.

The trade I’m referring to happened last week in the futures market, well to be precise, in options on futures. If you read my articles regularly, you’ll know I generally talk about options trades occurring in stock options or ETF options. However, there are some futures products where options trade extensively.

One of these futures is the 10-year US Treasury. Because the 10-year Treasury is an important benchmark rate, options tend to be active on this product. Yet, we’ve never quite seen a single trade like the one which happened last week.

A trader purchased a gigantic strangle in 10-year Treasury options, which makes money if the bond experiences higher than normal volatility. That is, the trader bought both a call and a put in the same expiration period but at different strikes. If the 10-year moves up or down a certain amount higher than the call strike or lower than the put strike, the trade makes money.

What makes this trade so unusual is that it may be the biggest options strangle ever recorded. The buyer purchased 63,500 strangles and spent $10 million in premium on the trade. What’s more, the trade only had nine days to expiration when it was placed. In other words, the trader dropped $10 million on a 9-day max trade. That’s a big deal any way you shake it.

More specifically, with the 10-year yield at 2.38% at the time of the trade, the strangle makes money if the yield climbs above 2.48% or below 2.28% by July 21st expiration. A 10 point basis move in the 10-year Treasury is a pretty sizeable move in just nine days. And 10 basis points is what the trade needs just to break even.

Here’s the thing…

The 10-year Treasury already dropped to 2.28% last Friday – albeit briefly – after inflation data came in a bit soft. As of this writing, the yield was sitting around 2.32% with expiration at the end of the week. The trader may have been able to cash in at least some of the straddles on Friday, when the strangle’s value climbed to around 18 ticks. But with more information coming from the Fed this week, the trader may be waiting for an even bigger move.

So far, it looks like quite the shrewd gamble on the part of the strangle buyer. We’ll know more for sure by the end of the week.

iShares 7-10 Year Treasury ETFSo how can you get in on the action? Well, I don’t recommend options on futures as they tend to be more specialized products than stock/ETF options. However, you can easily use a product like iShares 7-10 Year Treasury ETF (NYSE: IEF) to mostly replicate the trade.

On the other hand, a trade I like better involves iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT). TLT is much more liquid than IEF and the options trade in increments of $0.50 (IEF is only in $1 increments) so you can fine tune your strategy. We can also go out to August and buy a full month of time on the trade.

iShares 20+ Year Treasury Bond ETFWith TLT trading just below $124, you could do the August 122-126 strangle (buying the 122 put and the 126 call) for around $1.25. Breakeven points would be $120.75 and $127.25, only a 3% move in either direction. Given the expected economic and Fed news coming out in the next month, experiencing a 3% move in long rates seems like a reasonably high probability event.


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Category: Options Trading Strategy

About the Author ()

Jay Soloff is an options analyst with Investors Alley.