Heavy Put Activity Ahead of Fed's Decision: Options

By Jud Pyle, CFA, chief investment strategist for the Options News Network

NEW YORK (TheStreet) -- Heavy put activity hit the tape in the iShares iBoxx Investment Grade Corporate Bond (LQD Quote) Wednesday ahead of the Federal Open Market Committee's rate decision, and it's interesting that we're seeing more buyers than sellers.

Out of the gate today, an investor bought 10,000 LQD March 93 puts for $1.10 cents with the ETF trading at $102.90 a share. More than 10,500 of these puts traded before midday versus current open interest of zero contracts, according to OptionsHouse.com's option chain. The March 93 puts have climbed 32 cents so far on the day. This put price computes to an implied volatility of 11.9 compared to a 30-day realized volatility of 9.5.

LQD shares are up 20% from a 52-week low of $86.20 reached on Oct. 13 last year. The investor needs LQD stock to expire below $92.15 in the October expiration month to make money, or for the put premium to expand as a result of implied volatility rising.

With an implied volatility of just 11.9, it would not take very much fear and demand for options to push up implied volatility. LQD currently has a yield of roughly 5.6%. If investors begin to demand higher yields, than LQD could begin to slide. LQD shares are currently trading down 60 cents to $102.45.

The presence of put buyers such as this does not mean investors should run out and sell their LQD shares. However, it is interesting that some investors are buying downside protection after the rally LQD has experienced on a possible bet that shares will begin to drop following the outcome of the Fed meeting.