New York: A bet of potentially record proportions in the US Treasury options market might just pay off after all.
The benchmark US 10-year yield fell as low as 2.277 per cent Friday, with futures prices jumping to 126-01, after weaker-than-forecast readings on inflation and retail sales. At those levels, a so-called strangle trade in 10-year Treasury options, initiated Tuesday, likely turned profitable for the first time.
The position attracted attention because the trader paid almost $10 million upfront to purchase out-of-the-money put and call options simultaneously on 10-year Treasury futures. For a strangle, the size was possibly unprecedented, and, what’s more, the strategy expires on July 21. That means the trader had just a nine-day window to at least break even, which would require the 10-year yield to rise or fall roughly 10 basis points from about 2.38 per cent.
It breached that level Friday, though Treasuries pared their advance in part due to technical indicators around the 126 level on 10-year futures — right around the area that would turn the strangle profitable. The benchmark yield is still on pace for its biggest weekly decline in more than a month.
Strangle range
The trade would also have benefited equally from a similar size sell-off, and has potentially unlimited upside once it breaks out of the strangle range.
As the 10-year futures contract closed in on the call’s strike price, the value of the strangle surged. The price of the position, expressed in ticks in the options market, rose as high as 18 within an hour of Friday’s data release, from about 10 when it was initiated.
The bond market’s main focus next week will be the European Central Bank’s policy decision July 20, the day before the strangle position expires. The announcement could prove make-or-break for the trade.
