He said that high-yield debt could offer an interesting opportunity for options traders if things go haywire again. The high-yield debt is very levered to companies that have a harder time borrowing, and if we have some sort of an earnings recession, these companies might have problems paying back their debt, Nathan said.
He added that in such scenarios, high-yield indexes turn lower.
Small-cap stocks are showing signs of an earnings recession, as the Russell 2000 stocks had a year-over-year decline in earnings for the last two quarters, Nathan said.
He also thinks that options in HYG are really cheap, and in times of a broader market decline, the implied volatility of debt indexes increases sharply.
To make a bearish trade, Nathan wants to buy the November $86/$80 put spread for 80 cents. The trade breaks even at $85.20 and it can maximally make a profit of $5.20.
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