zerohedge.com / by Tyler Durden / Jul 12, 2017
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.”
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