U.S. Markets closed

What's behind put buying in loan fund

David Russell (david.russell@optionmonster.com)

Someone wants to protect a long position in bank loans using options.

Our Depth Charge monitoring program detected the purchase of 6,000 January 23 puts on the PowerShares Senior Loan exchange-traded fund, which holds debt issued by a wide range of junk-rated borrowers. The loans are higher in the capital structure than the high-yield bonds held by other portfolios such as iShares iBoxx High-Yield Corporate Bond fund (:HYG).

That gives them less risk and therefore less return. BKLN yields just 4.3 percent, compared with HYG's 6.2 percent payout.

Today's puts in BKLN cost $0.20, equivalent to a little more than two months of dividend payments. The contracts will serve as insurance against a major drop . (See our Education section)

BKLN is up fractionally to $24.89 in midday trading. It's down more than 1 percent in the last month as investors dumped risk assets including stocks and junk bonds. The shares are now back to their lowest levels since December.

Total option volume is 26 times greater than average so far today, with that big put trade accounting for all the activity.

More From optionMONSTER