Traders Dust Off 2000s Options Playbook to Cash In on Higher Rates

Citigroup Inc.’s option volume was light on a recent Wednesday, until the session’s last 90 minutes when a wave of trades hit. These weren’t bets on the shares moving — rather, they were part of a long-dormant strategy that’s back in vogue thanks to the Federal Reserve’s interest rate hikes.

The trade involves selling large volumes of put options that allow the holder to offload shares far above the current market level, and collecting interest on the premium received. It was pointless back when interest rates were near zero. But now, with Treasury yields at 5% or more, the strategy is suddenly worthwhile.

“Nobody did this for 20 years because there wasn’t any interest rates,” said Joe Mazzola, director of trading and education at Charles Schwab & Co. “Interest rates are back. It makes sense.”

The strategy is largely used by large institutional players “trading thousands at a time to make half a penny,” Mazzola said. “Mom and Pop don’t do this.”

In The Money Puts Back in Vogue

According to data from Cboe Global Markets Inc., these financing trades are taking place twice as often as they did just three years ago. The exchange operator pointed to repeated rate tightening as one reason traders have dusted off their old playbooks.