TBT Unusual Option Activity Report

As the era of $3 trillion federal deficits is wide open and another $1.9 trillion stimulus is moving through Congress, the bond market is getting skittish and option traders are looking to TBT. The option activity on Tuesday is pointing to significantly higher prices on ProShares UltraShort 20+ Year Treasury (NYSEARCA: TBT) by the end of the year.

If you’re not familiar with TBT, it’s a 2x leverage inverse bond ETF. That means that it’s a play on the expected rise in long-term Treasury yields. As a leveraged ETF, there are risks if there is a lot of volatility in the price movement but will generally rise as the yield on the 30-year Treasury were to rise over time.

One important thing to understand about the bond market is that long-term interest rates are determined mostly by inflation expectations. In contrast, short-term interest rates are influenced more by the Fed Funds rate.

With the Fed Funds rate at zero and the potential explosion in deficit spending, the prospects for inflation is significant.

TBT Options Activity

The options market on TBT was sizzling on Tuesday. Option volume was over three times the average at the time of this writing. Call volume was trading at three times the average and put volume over five times. The put-to-call ratio is around 0.30. Most all of the trades filled between the market as few market orders were sent. Let’s take a closer look at the significant activity:

• $19 call for the 21 JAN 22 BOT @ $2.03 against open interest of 979
• $25 call for the 21 JAN 22 sold @ $0.85 against open interest of 1,556
• $15 put for the 21 JAN 22 sold @ $0.95 against open interest of 441

The trade above was in one print for 7,500 contracts. The combination order involves buying a call vertical and selling a short put as a means of financing the trade. The net debit is $0.23 with a max gain of $5.77 per share.

TBT Technicals

The 30-year Treasury bond yield is steadily marching today 2.5%. Looking at a bigger move in longer-term Treasury yields gives some perspective on the potential in TBT. Looking at the weekly chart of TBT, you’ll see that the price broke out of a major bottoming formation last week. This breakout is following a $3.50 trading range since March. The projected move, based on the $3.50 range, is $21.50. This is near the 50% retracement of the sell-off entering 2020 and into the COVID crash.

Looking at the strike selection of the spread, the expected movement is to $25 or higher, which is near the 100% retracement area.

(Click on image to enlarge)

Conclusion

We’re entering into rather uncharted territory as the Federal Reserve expands their balance sheet at unprecedented levels and the Federal government expands the level of deficits and debt. Today's trade on TBT is one indication of the uncertainty and risk in the bond market.