Trade view /
14 September 2016 at 8:35 GMT
The high-yield bond market has been relatively strong and shares of the iShares Iboxx ETF (HYG) have been on fire for the last several months, gaining some 17% since March.
A pause of this rally is in the works and we expect the distressed debt to take a breather in the next four to five weeks. This gives an opportunity to collect some credit using a short vertical call spread.
The long-term trend in still unclear as the need for higher yield is still in demand.
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Source: Saxo Bank
Management and risk description
We are selling this two-point wide bearish vertical call spread in the high-yield bond market. Volatility has increased in the last three days which gives us better premiums. We only need for the price to trade below $86 for the next four to five weeks to collect on at least 80% of the premium.
It is a defined risk strategy with limited risk
Underlying Price: $85.41
Trade: SELL -1 Vertical HYG 100 21 OCT 16 86/88 CALL @ $.54 (to open)
Max. gain (expiration) = $.54
Max. loss (expiration) = $1.46
Breakeven(expiration) = $86.54
Entry: today, for a credit of $.54 but no less than $.50 per contract.
Stop: no stop.
Target: shares to trade below $86, to capture at least 80% of premium.
Time horizon: four weeks.
— Edited by Michael McKenna
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Non-independent investment research disclaimer applies. Read more