Buy HY puts versus IG payers, suggests Barclays Capital

Barclays Capital researchers noted in a comment put out yesterday that the difference between the volatility implied by investment grade and high yield options has increased recently, while the realised volatility basis has not changed.

To take advantage of this basis, they suggest selling payer options on the CDX NA IG index and buying puts on CDX NA HY. For example, investors can buy $40 million of September puts on HY at a strike of 98 for 234 basis points, and fund the upfront cost by selling $250 million of September payers on IG series 14 at a strike of 120 for 37.5bp.