ProShares UltraShort 20+ Year Treasury Options (TBT): Unusual Trading Activity

| May 30, 2012 | 0 Comments

TBT OptionsOptions in the ProShares UltraShort 20+ Year Treasury ETF (TBT) are showing some large activity today.

Before I jump into today’s trade details, let’s go through a quick refresher on TBT.

The ProShares UltraShort 20+ Year Treasury ETF is used by investors who believe yields on long-dated treasury bonds are poised to move higher.  And since bond prices move inversely to their yields, TBT buyers are also expecting long-term treasuries will drop in price.

You see, when long-term treasury bond yields rise and prices fall, TBT increases in value.

One more quick fact…

Many investors buy TBT because they think moves by the Federal Reserve to pump liquidity into the financial system will result in higher inflation.  And in turn, higher inflation will lead to a sinking dollar and rising bond yields.

History has shown a weak dollar is correlated to higher bond yields.

This thinking most likely explains why an option trader came in this morning and purchased 3,500 TBT June $16 – $17 call spreads.

More specifically, the trader purchased 3,500 TBT June $16 strike call options for $0.40 a share.  And he simultaneously sold an equal number of TBT June $17 strike call options for $0.13 a share.

The net cost to create this spread was $80,500.

Remember, a call spread is an option strategy where one call option is purchased and another is sold at a higher strike price.  This is done to reduce upfront premium as well as to limit risk.

So, what’s the potential gain on this trade?

It’s the difference between the strikes minus the amount he paid for the trade.  In this case, the trader paid $0.27 a share and can profit $0.73 a share or $255,500.

Not a bad risk reward!

But why execute this trade now?

The first answer a trader gives when asked this question is the popular, “rates just can’t go any lower.”

Well let me tell you something… they most certainly can!

However, it’s not likely they’ll fall much more from here.

I have a strong hunch this is why option traders are starting to position these types of trades with TBT.

Here’s why…

This ETF provides an easy way for investors to gain exposure to the long-dated US Treasury market.

And, more importantly, treasury rates are the lowest on a historical basis.   Meaning prices are at historical highs.  When this turns, TBT will skyrocket.

So, with the European crisis close to stabilizing one way or another, option traders will be ready to pounce on the probability that bond yields will begin to increase.

We’ll see!

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.