Unusual $8M Option Bet In iShares Bond ETF: Here's What It Means

What Happened: On Thursday, shortly after the cash market open, an options trader made a particularly large $8 million bet on the iShares iBoxx Bond ETF LQD. The trader placed a put spread on the December monthly op-ex (17th) at the $131 and $128 strikes for an estimated price of $0.80 on the $131 puts and $0.30 on the $128 puts.

This translates roughly to 160,000 options, of which you can see the large open interest at these strikes in the image below.

Why It Matters: The size of this option bet is unusual and clearly an institutional (or sophisticated) trader behind it. In terms of what type of bet traded here (bullish or bearish), there are two options:

1) This trader is either selling the put spread (i.e., selling the $131 puts and buying the $128 puts), which would make it a 'bull' put spread and thus have a bullish view on this ETF

2) This trader is buying the put spread (i.e., buying the $131 puts and selling the $128 puts), which would make this a 'bear' put spread and thus have a bearish view on this ETF

Considering the trade was executed at around the $133 price, it seems more probable the options trader was buying the put spread. This is because to sell the put spread at $133 would give this trader a worse price on those $131/$128 strikes. If they simply waited until it dropped lower, the price of those puts would increase, so an option seller would get more premium.

This suggests the options trader is buying a hedge on a potential long position because being short the bull put spread would only offer a $0.50 premium payout versus a $2.50 risk. And with a 67% of this bull put spread closing ITM (in the money), it would offer an inverted risk-to-reward ratio.

What's Next: If this option trader is buying a hedge or protection on a long position, it suggests they see this bond ETF pushing below the $131 strike, but not making it much past the $128 level.

However, if this option trader is selling the put spread (e.g., has a bullish view), then they don't see the bond ETF closing below the $131 strike by the December op-ex.