Big TLT Options Trade Suggests Rates Are Going To Stay Low

| April 6, 2015 | 0 Comments

Big TLT Options Trade Suggests Rates Are Going To Stay Low

Large and unusual options trades don’t just give us clues on the possible direction of individual equities. The same theory can be applied on a macro level.

For instance, a big options trade in a sector or country ETF may give us valuable information on a much grander scale. Of course, there are ETFs for just about everything. As long as options trade on those ETFs, we have the potential to see what the smart money is up to.

For instance, a recent large options trade could be giving us a clue on how long interest rates will remain at rock bottom.

The trade occurred last week in iShares 20+ Year Treasury Bond ETF $TLT. TLT tracks long-term US Treasury bonds and is generally the most popular vehicle for doing so (with about 10 million shares trading per day).

Currently, $TLT is trading at $130.62, up 4% on the year. That’s just 5% from the 52-week high of $137.95, and 25% from the 52-week low of $104.44.

So what does a TLT options trade tell us about interest rates?

First off, for a more in-depth look at TLT, you can check here.

Here’s the deal…

A large call spread traded in TLT in June options. The trader bought the June 134 calls while selling the 139 calls. The spread traded over 17,000 times for $1.26 per spread.

As a reminder, a long spread like this is often called a debit spread. That just means a cash outflow is occurring at the time of the trade. The cash outflow is also the max loss on the trade. In this case, that’s about $2.1 million.

The trade makes money if TLT closes above $135.26 on June expiration. Max gain is at $139 or above, with the trader making roughly $6.4 million in that scenario. Not too shabby!

Here’s the chart of $TLT:

As you can see above, the ETF is sitting right at the 50-day moving average. Traders are perhaps considering when the Fed is going to raise rates. However, the big call spread this past week suggests the next big move could be higher.

interest options trade, a chart of TLT

It looks like TLT options traders expect rates to stay low.

Keep in mind, TLT goes up when the price of long-term Treasury bonds go up. And, as bond prices go up, yields go down. In other words, interest rates go down or opposite the price of bonds.

Of course, the Fed can’t lower the Fed Funds Rate any lower. But, the central bank can refrain from raising rates. So, this trade is banking on the Fed not raising rates in June or before.

In fact, the consensus is that the Fed won’t be raising rates until late this year. Now, there’s a good amount of money supporting this view.

Yours in Profit,

Gordon Lewis
Options Trading Research

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.


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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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