Someone Just Made An "Unprecedented" Bet On An Imminent Surge In Bond Volatility

Step aside "50 cent", there is a new mystery vol trader on the block, one who is certain that a vol quake is about to strike US Treasurys.

According to Bloomberg, which first spotted the trade, someone just bet that bond volatility is about to soar. The unknown trader bought $10 million in out-of-the-money puts and calls on 10Y Treasury futs (a strangle). The outsized trade was spotted as it involved huge block sizes of about 63,500 on either side: "a strangle of that magnitude is rare, and possibly unprecedented" according to several rates traders who spoke to Bloomberg.

But just as notable as the size is the timing: the strangle expires July 21, giving the trade a shelf life of under 10 days before it expires worthless. Which means that the trader is confident enough about not only the size of the upcoming price swing to bet $10 million on it, but also when it will strike.  According to Bloomberg calculations, the theta on the trade is so high that just to recoup the premium, the yield on the 10Y would have to rise or fall about 10 bps from 2.38%, and preferably very soon.

Once the 10Y moves beyond 10bps, gains are unlimited, and the trader "stands to gain about $50 million on a quarter-point move in either direction from the starting level, which would involve approaching this year’s highs and lows for 10-year yields."

Briefly this morning, the trade seemed like slam dunk when Yellen's "dovish flip" sent the 10Y tumbling 6 bps before it stabilized around 2.32%.

But it's not over yet: as Bloomberg observes there are enough potential catalysts in the coming week to send the 10Y surging... or tumbling:

The calendar over the next several days presents ample opportunities to rekindle volatility. In the U.S., political drama aside, the Labor Department releases consumer price index data Friday, which could influence the Fed’s timing for rate hikes and balance-sheet reduction. Retail sales data come out the same day. And, the day before the position expires, the European Central Bank announces a policy decision.

Backtesting the trade does not give high odds of success: not only has MOVE (the Tsy vol index) plunged alongside VIX, suppressing price swings but the 10Y yield has risen or dropped by more than 10 basis points just four times this year on a weekly basis, compared with 10 times in the same period of 2016 according to Bloomberg calculations. Then again, lightning may be about to strike twice: at last check, the MOVE was trading at levels just before the 2013 Taper Tantrum. We all know what happened to bond volatility after.

What about the mysterious trader's counterparty - are they, inversely, betting that vol remains subdued for the next 10 days? This time the market maker appears to not be convinced that the prevailing lack of volatility will persist, and as Bloomberg concludes, "the total volumes traded in the two options Tuesday exceeded the open interest change" suggesting that the other side of the trade was likely hedged.

Finally, what is perhaps also notable is that while the trader has a very high conviction on a surge in rates vol, there was no comparable bet on exploding vol in any other asset classes, which may be an option for anyone wishing to piggyback on the trade, as such a sharp move in US Treasurys will certainly reverberate not only in US equities but in bonds around the globe.


DavidFL Wed, 07/12/2017 - 17:18 Permalink

This trade is likely a hedge aginst something bigger - perhaps a currency trade set up. I would not be surprised to see it expire worthless.

Cordeezy (not verified) Wed, 07/12/2017 - 17:18 Permalink

It isn't that risky of a bet considering the market has had little volatility since January.  September usually brings volatility when traders start trading again after summer breaks 

Barney08 Wed, 07/12/2017 - 17:34 Permalink

The trade was done by BigESmall? The fact that vol is completely absent (ex Up Up and Away) says to me he is looking for a tax loss type trade from all the Yellen gotten gains. BTW I really like the way Janet has stuck to her guns on the whole inflation thing.

Does anyone feel like the Fed is playing a game of whack a mole? Here today gone tomorrow but back again the next day...this would be funny if it weren't so pathetic.

I am just sooooo tired of all this. For what, for who, maybe I'll put the whole lot into a long SNAP trade and be done with it for good. The

Fininacial Suicide by SNAP. CAUSE. OF DEATH = SNAP

jmack Wed, 07/12/2017 - 17:34 Permalink

all the markets are way too balanced, something is about to bust one way or the other.  10 days is pretty short time line to put down a few tens of millions of dollars though 

Dewey Cheatum … Wed, 07/12/2017 - 17:52 Permalink

These fucks are depesrate for Vol, to work the spreads. I'm thinking this is designed to spoof markets, and btw, gigantic money playin' cheap field and hardways bets.If you don't first have churn...then there is no burn.

Too-Big-to-Bail (not verified) Wed, 07/12/2017 - 17:58 Permalink

Dam Son, I'm wondering if this is a "are you feeling lucky?" or more of an inside job-type bet

The Real Tony Wed, 07/12/2017 - 18:04 Permalink

At least he bet it like a man. I've been buying deep out of the money puts on the major market indexes monthly for the past several years figuring if they take the market down it will fall more than fifty percent in one day. Or more to the point will fall 50 to 60 percent the day the stock market reopens for trading some two weeks to a month later.

Clowns on Acid Wed, 07/12/2017 - 22:15 Permalink

7 days is a quick play, theat is brutal with that play.....BUT... I think that a few people think like this :

  • Yellen says that the Fed will reverse QE and sell USTs and MBS back into the market....slowly ( $4T ?). Great...why wait until the Fed does?
  • When the Fed said that they were going to implement QE...the MOney jumped in front and gbought bonds (and stocks).
  • reverse QE...why wait until the Fed starts selling ...even slowly? Sell bonds (and stocks) before they sell into market?
  • If the FEd is slow to what? Keep the pressure on them by selling bonds in front of them.
  • If the Fed balks on selling the QE bonds, and keeps the $ 4 T on its balance sheet....the USD will be under pressure (ok...other the same...I know).
  • Sell bonds ahead of reverse QE and keep the pressure on the FEd to sell into an Offered market...or they hold back and destroy their credibility aned the USD.
  • I think the boy (although 7 days is short) has a good idea with Vol being at historic lows.
ZHcpaG8R Wed, 07/12/2017 - 22:35 Permalink

This looks like a stick up at the teller counter.  The strangle is the pointed gun.  What you are not seeing could be the bags of money being taken off the table.