A Roundabout Way To Play Bond Vol

The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Drop.

Hey Traders,

The release of yesterday’s Fed minutes sent the market into a spiral …

And the VIX surging higher.

But the VIX and broad market indexes aren’t the only thing getting hit by the increasing Fed hawkishness …

iShares 20 Year Treasury Bond ETF (Ticker: TLT) has not had a hot start to 2022, with TLT now approaching six-month lows.

But if you look at TLT’s 30-day implied volatility (the red line on the bottom half of the graph), you will see vol has not really spiked, only started to swell a little bit.

What does this mean?

If vol continues to swell, we could be getting ready to see TLT flush below $140, a level it has not breached since June.

Now, what implication does this have on the broader market?

It will be yet another headwind facing tech stocks …

But a tailwind for Financial Select Sector SPDR Fund (Ticker: XLF).

XLF has been climbing, and XLF implied volatility (red line on the lower graph) is cheap right now.

Now the question …

How do you play this?

Personally, I like long calls in February …

Your Only Option,

Mark Sebastian

 

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