Trading the Fed with Options

Focus: STRATEGIES

Jay Soloff Image Jay Soloff Lead Options Analyst, Investing Alley

Instead, it’s much easier to trade interest rates using ETFs of Treasury securities.

The most popular Treasury ETF is the iShares 20+ Year Treasury Bond ETF (TLT). However, if you want to trade intermediate-term rates, the better choice is iShares 7-10 Year Treasury Bond ETF (IEF). While IEF isn't as heavily traded as TLT, it does trade 2 million shares a day on average.

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In fact, someone just made a huge trade in IEF recently which also may clue us in to what big investors think will happen with interest rates in the coming months. Here’s the trade...

An investor executed a BuyWrite on IEF, buying 1 million shares of IEF at just under $107 per share while simultaneously selling 10,000 January 19, 2019 108 calls for $0.90 per contract. A BuyWrite is the less commonly known name for a covered call trade. This covered call trade with 10,000 options and 1 million shares is about as big as you'll see.

In fact, the trader will collect $900,000 in premium from the call selling, while also getting long the shares at around $107. He or she could make close to $2 million on the trade if IEF closes at $108 next January. The trader will also be protected down to just above $106 due to the premium from the call trade.

In other words, this covered call is a mildly bullish trade on bonds (or a mildly bearish trade on interest rates since bond prices are the inverse of interest rates), since the max profit is at $108.

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