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Betting On Volatility Ahead Of The FED: TLT Straddle

|Includes:iShares 20+ Year Treasury Bond ETF (TLT)
Editors Note: Thanks to the New LiveVolPro.com for Charts and Information Below - We are Currently Running a Full Review on the World Class Volatility Program, in the meantime you can check out the free version here (LiveVol.com).  

Around 12:35PM on Wednesday just 90 minutes prior to Bernanke & Co. released the ‘official' outlook on the US economy a large options trade was placed in a benchmark bond ETF.  The Lehman 20+ Yr. Treasury Bond ETF (NYSEARCA:TLT) saw heavy options action in the form of what looks like a bearish leaning straddle trade.

January 115 PUT

Images Courtesy of LiveVol.com 


January 115 CALL

Image Courtesy of LiveVol.com

Traditional Straddles employ the use of buying an ATM call and ATM puts where the buyer's expectation is increased volatility (in either direction).  In effect, one side goes worthless while the other side increases in value theoretically netting out in a gain.  Generally, volatility must increase a substantial amount fast and buyers should also be concerned that this expectation may already be priced in. 

Profit/Loss TLT 115 Straddle


In today's case, the large option trade can be broken down into a bet on treasury volatility with a bullish bias on bond yields.  TLT reflects the price of bonds, which trades inverse to yields.  Effectively, the buyers of the bearish straddle expect rates to increase, either in the short-term or certainly before January.   As of now the total investment is around 11.5 million, a hefty gamble to make 90 minutes before the FED statement.   

TLT 3 Month Chart with Implied Volatilities 30, 60 90
Image Courtesty of LiveVol.com
 
Stocks: TLT