Monday, May 5, 2014

Aqumin Volatility Newsletter 05/05/2014 $TLT

Bonds flying high

So the NFP is out and we finally have a number that is creating a few more jobs. That should push up rates, right? Nope. Without the push on wages, bonds are once again outperforming stocks for the day in 2014. What I think is curious is how hard the IV went down today post NFP.

I expect IV to contract in the TLT and other FI after the NFP but today’s was a smoking. The TLT had a near 2% round trip today and the volatility is now trading well into the 9 handle in the near term. Those are options totally ignoring the breadth of the move. The TLT is continuing to roll in the face of all the anecdotal evidence it should be moving the other way.

5-5-2014 9-12-17 AM

That gives us a couple of alternatives:

1. There is not enough ownership of fixed income

2. Too many funds are leveraged short Treasuries in some way

It is probably a combination of those things but the very cheap volatility makes gamma of the TLT options enticing at this point. I think you buy 1 month or older strangles but lean them a little long. I don’t think the squeeze in T-bonds is over yet. The cheaper volatility strangle should help if the shorts get done covering and TLT melts away.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

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