Options traders are going bottom-fishing for bonds. It is a risky move, but one that could — with a bit of luck — result in sizable profits. That is, if the past is any guide.
Demand for bullish out-of-the-money call options tied to the iShares 20+ Year Treasury Bond ETF, better known by its handle “TLT,” has surged over the past few weeks, according to data from Cboe Global Markets, even as yields on longer-dated Treasurys have marched higher.
If nothing else, the spike in demand for TLT calls is a sign that traders see opportunity amid the latest bond-market meltdown. The yield on the 10-year Treasury note was up by 3 basis points at 4.801% on Monday, grazing its highest level since late 2023. Bond yields move inversely with prices, rising as prices fall, and vice versa. Yields on international government bonds have moved higher as well.
The yield on the 30-year bond, meanwhile, was up 3 basis points at 4.988% on Monday after it tapped 5% for the first time in more than a year following Friday’s blockbuster jobs report. TLT has most of its holdings concentrated in 30-year bonds issued over the past decade.
Rising demand for options that would pay off if bonds rallied has moved so-called skew — which gauges investors’ appetite for bullish out-of-the-money options relative to bearish ones — back toward the flat line.
That is unusual. Previously, when bonds sold off over the past few years, skew rose, according to Mandy Xu, head of derivatives-market intelligence at Cboe, who elaborated on this trend in a report shared with MarketWatch on Monday. Skew in TLT options peaked around 3% during bond-market selloffs in late 2023 and 2022, Xu said.
“In other words, traders are currently pricing roughly equal chance of yields being lower vs. higher in the next 3 months and are using options to fade this move,” Xu said.