The Treasury market experienced a day of extreme volatility, turning a substantial bearish options bet from a potential win into a nearly worthless position. The tumultuous day was triggered by a flurry of job and service-industry data, causing significant swings in the market.
The trade, initiated on a Thursday afternoon, initially benefited from a surge in US 10-year yields, precisely as anticipated following a stronger-than-expected job and wage growth report for December released on Friday morning. During those moments, the position briefly soared in value, offering the possibility of a five-fold gain on the initial bet.
However, the market dynamics changed as traders delved deeper into the details of the payrolls report, revealing a softening in the services sector. Yields retreated from their highs, and by Friday afternoon, the 10-year note stood at around 4.05%, higher for the day but far from the 4.15% breakeven level targeted by the options wager, which expired at the close of the trading day.
Although the identity of the options bear remains unknown, the bold nature of the bet is evident. The potential payoff was substantial; the position, initiated at a cost of $625,000, could have reaped up to $10 million in profit if the 10-year yield had ended Friday’s session around 4.20%.
The fate of the short-lived winning window is uncertain. It is unclear whether the trader unwound any part of the position during the surge after the jobs report. The trader may have also benefited from an underlying position in the market, possibly initiated to protect against potential losses. Bearish positions like these are often used as hedges in conjunction with other market bets, often involving derivatives like futures and options.
In other parts of the market, with yields generally on the rise, the sentiment among options traders remained bearish on Friday. The morning session witnessed a flurry of positions targeting higher Treasury yields, some set to expire in just a week. During this time, the market will absorb the latest key data on inflation, along with $110 billion of Treasury securities slated for auction.
In the dynamic world of finance, there’s always something to bet on.
