* Protective option trades seen in bond ETFs
* Call Spread on TBT highlighted on Wednesday
By Doris Frankel
April 5 (Reuters) - Option players appear to be betting on higher U.S. Treasury yields as Federal Reserve policymakers appear less likely to add more monetary stimulus to keep short term interest rates low.
Options volume this week was heavily tilted in favor of put options in the iShares Barclays 20+ Year Treasury Bond fund, or TLT while call turnover increased in the Proshares UltraShort 20+ Year Treasury Fund. The activity in both suggest that investors are positioning for higher long-dated yields.
Minutes from the Federal Reserve's March policy meeting released Tuesday suggested fewer Fed policymakers felt the need for more bond purchases soon to bolster the U.S. economy than back in January. This led to a broad market sell-off on Wall Street with prices of the 30-year Treasury bond falling more than one full point.
On Thursday, 30-year Treasury prices gained 19/32 to drop the yield to 3.32 percent. T he yield on the 30-year closed at 3.48 percent on March 19, which was the highest since September 2011.
"We have seen a lot of put buying on TLT and call buying on TBT," said Joe Bell, senior equity analyst at options research firm Schaeffer's Investment Research.
"This may be due to expectations that interest rates could be raised sooner rather than later," Bell said. "It also could be speculation that the prices of 20-year Treasuries have reached a top and will decline from here."
This week 307,000 puts and 92,000 calls have changed hands in the TLT while 283,000 calls and 45,000 puts traded in the TBT, according to options analytics firm Trade Alert.
The TLT is an exchange-traded fund that tracks the long end of the Treasury yield curve. Investors often use equity puts, allowing them to sell the shares at a fixed price any time up until expiration, to guard against downside market risk.
In this case, when TLT fund loses value, bond prices are falling and yields are rising. So buying a put on the TLT is another way to bet on higher long-term rates.
Shares of the TLT rose 0.71 percent to $112.91 and its option turnover consisted of 61,000 puts and 23,000 calls.
By contrast, the TBT is an ETF that gains when long-term Treasury bonds fall. The TBT's daily performance is intended to double the opposite of Barclays Capital 20+ Year U.S. Treasury Bond Index, which tracks the daily return of long-term Treasuries.
The fund moves 2 times the inverse to TLT, thus buying a call - a contract which conveys the right to buy shares at a fixed price - is a bearish view on bonds. The TBT ended Thursday at $20.09, down 30 cents.
Joe Cusick, senior market analyst at online brokerage OptionsXpress, noticed that on Thursday an investor bought a block of 21,400 June $110 puts on the TLT for $2.42 per contract. "The hefty premium purchase, of more than $5 million, seems to reflect concerns about weakness in TLT," he said.
"Since the fund holds a basket of longer-term Treasury bonds, the put purchase seems to express the view that prices will fall and yields will rise," he said.
On Wednesday, Cusick also highlighted the trading of big put spreads in the TLT, notably the July $95-$100 put spreads.
Later on Wednesday, a big call spread traded in the TBT. An investor bought 52,000 April $21-$23 TBT call spreads for 31 cents looking for the fund to rise to $23 or better by April expiration in two weeks, said WhatsTrading.com options strategist Frederic Ruffy.
Ruffy said "while the spread appears to be an aggressive short-term bet against Treasurys, it's possibly a position adjustment." More than 60,000 contracts traded in both strikes and open interest was sufficient to cover.
Over the 10 trading sessions ended on Wednesday, investors bought nearly three times more puts than calls in the TLT on three U.S. options exchanges as fresh positions, according to Schaeffer's Investment Research. This put-to-call ratio is higher than 98 percent of the readings taken over the past year.
In the TBT, the 10-day call-to-put ratio was 9.78 calls for every put bought, Schaeffer's data showed.