TLT Unusual Option Activity Report
As Joe Biden continues to lay out his cabinet selections, one selection may have bond bears looking at the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT). The selection of Janet Yellen as Treasury Secretary is one that should be good news for inflationists. The diminutive but not di minimis Janet Yellen’s saw her tenure as Federal Reserve Chairman end in 2018. That stint as the first female Fed Chair ended after 4 years. Following Monday’s announcement, the options market is starting to build trades to capitalize on a near-term correction in TLT.
After leaving the Federal Reserve, she has been asked several times about her stance on Modern Monetary Theory (MMT). She has continued to offer skepticism, but the pressure will be on to find a way forward to print more money.
The role of the Federal Government to be the borrower of last resort and the Federal Reserve to be the lender of last resort will continue to mount. In fact, the Trump administration has expanded the role of the Federal government greatly in this regard. The distrust for a Biden administration to handle these programs appropriately is causing the current Treasury Secretary, Steve Mnuchin, to take down some of these programs by the end of the year.
Let’s take a look at Tuesday’s option activity.
TLT Option Activity
As of the time of this writing, the put option activity on TLT was sizzling. Put option volume was over 3.4 times the average and call option volume was a little over half the average. Virtually all of the activity is getting filled between the market but is still verifiable as put option buying. Here is the details of the trade that was made:
- 20,000 11 DEC 20 $155 put BOT @ $0.38 against open interest of 76
That is a trade with a notional value of $760K with 17 days to expiration and a breakeven of $154.62. That’s not a trivial amount of money for one trade and is certainly big for this product. This reflects an expectation that TLT will move lower in the near-term toward, and likely beyond, it’s $155 support.
TLT Technicals
U.S. Treasuries and TLT have made some strong bullish movement over the past couple weeks. However, the vaccine announcements and the potential for inflationist policy implementations has to be making the bulls nervous. Tuesday’s bearish movement and option activity looks to be reflecting this dynamic.
Looking at the chart of TLT, you’ll notice that the price is testing it’s $161.50 resistance that it’s established since the August 28 low. The price traded strongly into that level last Friday and formed a bearish harami when Monday’s neutral candle is added. Tuesday’s price action is just a continuation of the indication of bullish exhaustion that was exhibited earlier.
As you look back over the many months since the “Corona Crash,” the $155 area has acted as a level of support. The price broke that level for two days on March 18 and March 19, but quickly reversed. A near-term projected pull-back would have a retest of that level likely and the options market appears to be pricing that in.
Conclusion
A Janet Yellen appointment may be providing a catalyst for a Treasury market and TLT correction, but the foundation has been laid for a long time. The uncertainty over future policy no matter who takes office lends itself to more volatility in a product that frequently moves more slowly. The near0term potential is just a reflection of the uncertainty and volatility in the Treasury bond market.
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