U.S. Treasury options activity signals potential turn in bond sell-off

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Treasury options signal bond turn

Highlights

TLT options volume surges 50% above its 30-day average Wednesday, with nearly 370,000 calls outpacing fewer than 100,000 puts, signaling increased bullish sentiment.
An aggressive trader spends at least $250,000 on October 82-strike and 80-strike TLT calls shortly before a strong 10-year Treasury auction sparks a bond rally.
Utilities ETF XLU rises about 3% after a $1 million put sale, and Wednesday's options flow shows diminished downside hedging, reflecting easing yield pressure in rate-sensitive sectors.

Options positioning builds after strong 10-year auction

As reported by CNBC, trading in the iShares 20+ Year Treasury Bond ETF, TLT, turns heavily bullish on Wednesday, with volume running about 50% above its 30-day average based on data compiled from Cboe LiveVol and SpotGamma.

Traders buy nearly 370,000 call contracts versus fewer than 100,000 puts in TLT, while put selling also appears in the flow. Nine of the 10 most-traded contracts in the ETF are calls, and although some call selling is present, overall volume and premium lean toward bullish bets that higher yields may offer less attractive risk-reward from here.

The most active monthly October 30 expiry trade is the purchase of the 82-strike call, a 10-cent contract that trades around 16,000 times during the session. That position requires a sharp rebound in long bonds, effectively reversing losses since September 22, when TLT falls 6% and the 30-year yield moves above 5.6%.

Much of the buying appears to come from one aggressive trader at 10:01 ET, spending at least $250,000 on 25,000 of the 82-strike calls expiring October 16 and October 30, along with 5,000 of the 80-strike calls expiring October 30. The purchases are not especially large in dollar terms, but they represent the biggest contract buy for month-end expiry and arrive shortly before a 10-year note auction that sparks a strong rally in bonds.

Jim Perry, founder and chief investment officer of Perry International Capital Partners, says demand at the 10-year sale is unusually strong. He says buyers are effectively willing to accept market prices to secure the bonds, while another test comes later in the day with a 30-year bond auction scheduled for 1 p.m. ET.

Utilities and broader markets reflect easing yield pressure

The TLT options activity follows similarly optimistic positioning in the rate-sensitive utilities sector. On Friday, trading in the XLU ETF shifts away from the steady put buying that has dominated the prior month, with one trader instead selling $1 million of puts in a wager that the sector's decline will slow or reverse.

Utilities rise about 3% after that trade, and Wednesday's XLU options flow shows little renewed demand for downside protection. Of roughly $12 million in premium exchanged on the ETF, only about $1 million is tied to calls, even as call selling remains a notable feature of trading.

Perry says yields may be topping out, though he adds that he would still prefer equities over bonds. In his view, if yields decline, stocks are likely to outperform bonds, underscoring how lower rate expectations could support a broader shift in investor positioning across interest-rate-sensitive assets.

In our earlier article, Ray Dalio warned that rising U.S. Treasury yields are eroding equities’ valuation cushion, making stocks more vulnerable as the cycle progresses. He argued that while earnings growth has helped equities hold up, weakening free cash flow and widening credit spreads could eventually tighten financial conditions enough to pressure risk assets.

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