Are Junk Bonds Heading Even Lower?

| About: iShares iBoxx (HYG)

By David Russell

The bears are growling at junk bonds. optionMONSTER's Depth Charge monitoring system detected the purchase of 4,000 October 86 puts on the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG) for $2.375. An equal number of October 83 puts was sold at the same time for $1.30. Volume was more than 50 times open interest in both strikes.

The HYG fell 0.9 percent to $85.88 on Friday. It's been dropping since late May and seems to be leading the S&P 500 lower. While the HYG has existed only since 2007, high-yield bonds as an asset class have a history of foreshadowing moves in the broader market.

Based on the option activity, further downside could be on the horizon. The trade cost $1.075 and has to earn a profit of 179 percent if HYG closes at or below $83 on expiration. It's known as a put spread because the income from selling out-of-money contracts was used to buy puts that were closing to the money.

Overall option volume was 9 times greater than average in the session, with puts outnumbering calls by 15 to 1.