Credit - High Yield ETF - The Fast and The Furious

"Abused patience turns to fury." - Thomas Fuller 

Watching with interest the latest sell-off in the ETF High Yield credit space with our good cross asset friend, we thought we could only come up with this cheeky title given the ETF HYG, which we have been monitoring, notably because of its correlation with the S&P 500, saw some significant outflows yesterday, with 305 millions USD outflows, representing 2% of AUM - chart source Bloomberg:

As our good friend commented, outflows on the US High Yield market have been accelerating this week, particularly on the two most active and liquid ETFs, namely HYG and JNK who lost around 10% of AUM (assets under management) in two weeks (out of 30 billion USD of total AUM). The acceleration of this movement has highlighted the growing decorrelation as displayed above between US High Yield and the S&P 500 which so far has held its ground relatively well.

As reported by Bloomberg by Lisa Abramowicz, losses on junk-bond ETFs have been outpacing the broader High Yield market:

"Losses on junk-bond exchange-traded funds are outpacing the broader U.S. speculative-grade market by the most in three years, signaling a deepening slump for debt that traded at record-high prices less than a month ago.

BlackRock Inc.’s $14.5 billion iShares iBoxx High Yield Corporate Bond ETF, the biggest of its kind, plunged 2.6 percent in May, 2.1 percentage points more than the decline in the Bank of America Merrill Lynch U.S. High Yield Index. Investors redeemed 3.3 million shares, or about $305 million, from the fund June 4, its biggest one-day outflow on record.

After reaping returns of 127 percent since 2008, junk-bond buyers are demonstrating concern that rising interest rates will erode future gains as Federal Reserve policy makers consider a pullback from stimulus measures that fueled demand for the debt and pushed yields below 6 percent for the first time on record. While ETFs hold less than $40 billion of the $1.15 trillion U.S. high-yield bond market, they act as a quicker gauge of market sentiment because their shares trade more frequently than most corporate bonds." - source Bloomberg.

If you do not believe in the "tapering QE" scenario, which led to a recent surge in US yields on government bonds and this recent sell-off on credit, then the relative value of High Yield, is starting to be compelling again (6.50% in YTM - yield to maturity versus S&P 500). 

So, we think you should pay attention to the movement in High Yield particularly because of the thin liquidity in credit and if the "crowded" long exposure to High Yield is followed by a panic reaction in the market.

You can as well play this move via options following the compression in the 3 months volatility spread between High Yield and S&P 500 (chart 3 - with volatility on listed ETF HYG, similar trend if you look at the volatility on the CDS index CDX HY on the OTC market):

Chart 1 - ETF HYG versus S&P 500 over one year and a half - source Bloomberg:

Chart 2 - CDX HY versus S&P 500 over the same period - source Bloomberg:

Chart 3 - Bloomberg chart displaying 3 months volatility between the S&P 500 versus ETF HYG (High Yield):

"Fury itself supplies arms." - Virgil

Stay tuned!

Is the game rigged?

Burger King Option Trading Surged Before Buyout Bid

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aWEU9X.UxFJg&pos=4

Is the game rigged?

Someone knew, once again.

"Trading of bullish Burger King Holdings Inc. options surged to a record Aug. 25, a week before the second-largest U.S. hamburger chain agreed to be acquired by 3G Capital, lifting the shares 25 percent today."

“You don’t see 30,000 options being accumulated in Burger King ever,” said Alec Levine, a strategist at Wallachbeth Capital LLC in New York. “It’s probable that it was leaked information about the deal, and they seemed to know the pricing and the timing.”

"October $20 calls were the most-active on Aug. 25, changing hands 20,714 times to account for more than half of call volume, according to data compiled by Bloomberg. Those contracts more than quadrupled to $3.50 today, a sevenfold gain from their close at 50 cents on Aug. 25."

And that's what I call being discretious...Very short out of the money and short option to maximise the gains...

This is very sleazy trading...once again!

“There’s the potential that it was the use of inside information,” said Ophir Gottlieb, a trader and head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “I don’t want to scream bloody murder, but it’s not normal.”

Potential? Give me a break...

It reminds me of this story I archived once it was published on Bloomberg, entitled "Bringing Down Bear Began as $1.7 Million of Options"

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aGmG_eOp5TjE

"In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million."

Another potential use of inside information?

"Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash."

It was another example of trading with discretion on some information:

``Even if I were the most bearish man on Earth, I can't imagine buying puts 50 percent below the price with just over a week to expiration,'' said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. ``It's not even on the page of rational behavior, unless you know something.''

`Lottery Ticket' - Yes, that's what it is called...

``On CSI Wall Street, the options are the DNA,'' he said, referring to the television series, ``Crime Scene Investigation.''

Always whatch abnormal options market movement like the above, it tells you that someone, obviously knows more than you do...

Remember this?

``Somebody placed some big bets that day that paid off,'' McCarty said. ``The question is, did they make it pay off?''

On March 14, when Schwartz sought emergency funding, Bear Stearns opened at $54.24 in NYSE trading. That day, the CBOE listed eight new put options that expired in five days with strike prices that ranged from $22.50 to $5. The lowest was 90.7 percent below the opening stock price.

Gail Osten, a spokeswoman for the CBOE, declined to say who placed the order for the options.

``Nobody in their right mind would buy that put unless you knew what was going down,'' said Ray Wollney, Olagues's partner at Truth in Options. On Friday, March 14, a total of 6,303 of the March $5 Bear Stearns puts traded.

"Options bets that looked irrational on Friday proved brilliant on Monday, when the shares traded between $3 and $5. By Wollney's calculations, the traders who spent $35.8 million on the deep out-of-the-money puts reaped an estimated $274 million windfall from the plunge in Bear Stearns.

Peter Chepucavage, a former general counsel for compliance at Nomura Securities and onetime SEC lawyer, said the Bear Stearns bets were neither smart nor lucky.

``When you buy $5 strikes when the stock is trading over $50, you either have to be manipulating, or you have to have insider information,'' said Chepucavage, who's now with Washington-based Plexus Consulting."

As Checupavage tells us:

``Track the rumors, follow the puts.''

or the calls in Burger King's case...