Put volume, or bearish bets, on an exchange-traded fund tracking high-yield bonds rose to the highest since November after a single trade with a strike price 3.9% below Monday's close.
An investor bought a block of 4,000 April $39 puts to sell the SPDR Barclays Capital High Yield Bond ETF for 15 cents each at 11:35 a.m. in New York, according to a report from options strategists at Susquehanna Financial Group LLLP in Bala Cynwyd, Pa., and data compiled by Bloomberg.
Almost 4,600 puts changed hands Monday, more than 10 times the four-week average and 228 times the number of calls to buy. The April $39 puts were the most-active contracts and accounted for more than nine-tenths of all options volume. The ETF, which rose 0.2% to $40.57 Monday, has an average of 439 puts and 99 calls trading each day. The ETF gained 3.4% in the past year.
The Standard & Poor's/LSTA U.S. Leveraged Loan 100 Index rose 0.05 cent to 95.88 cents on the dollar Monday, after three days of declines. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has fallen from 96.48 cents on Feb. 14, which was the highest since November 2007. High-yield, high-risk bonds and leveraged loans are rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.
Bonds from Citigroup Inc. and Morgan Stanley, both of New York, were tied for the most actively traded U.S. corporate securities by dealers, each with 87 trades of $1 million or more, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
The Barclays convertible index rallied 19.5% in the six months ended in February, compared with a loss of 0.66% for Bank of America Merrill Lynch's Global Broad Market Corporate index and a gain of 26.5% for the Standard & Poor's 500 index. That's the longest streak since the index rose for seven straight months ended in September 2009.
Convertibles are in a “sweet spot,” said Justin Kass, a money manager who helps oversee almost $4 billion of the debt at Allianz Global Investors Capital in San Diego. He estimates the securities capture as much as 80% of the gains in stocks and suffer only 40% to 50% of losses.
“You're getting an asymmetric risk-reward blend,” Mr. Kass said. “On the up days you're moving higher and on the down days you have a lot more damped volatility in regard to the underlying equity. That is really the sweet spot of the convertible.”
In return for being able to swap into stock, buyers of equity-linked securities accept a lower coupon than they would for a bond without that option. When stocks gain and volatility is high, the chance of a share hitting the strike price rises and the options become more valuable.
Old Republic International Corp., a Chicago-based insurance holding company, sold $500 million of 3.75% convertible senior notes on March 3 that are due in 2018. The coupon compares with an average of about 5.89% for investment- grade finance company bonds due in five to seven years, according to Bank of America Merrill Lynch index data.
The BarCap U.S. convertibles index has fallen from its peak on Feb. 17 as stocks declined amid soaring oil prices and protests in the Middle East and North Africa. The bond index dropped 0.06% to 208.46 from March 1 to 4, compared with the S&P 500 Index's 0.46% decline in the same period.
On average, more than $90 billion of convertibles expire each year worldwide, according to Nomura International Plc. That compares with average sales in the three years through end-2010 of about $85 billion, according to data compiled by Bloomberg.