Opportunistic Traders Focusing On Upside Eurodollar Option Structures

Futures are lower with Reds (EDU0-EDM1) leading the way
Opportunistic buyers focus on upside structures
Quarterly volatility mostly unchanged
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: Monday, August 13, 2019

 

Strong CPI pushed futures lower. The strongest core inflation reading in 6 months is equivalent to Core PCE running about 2.3%, well above the Fed’s target. Futures took another leg down on China/US trade talk headlines.

 

Big Trades

EDV9 98.50 calls, paying 2.25 on 30K (bought 90K yesterday, covering short leg of call structures)

EDM0 99.50/99.625 call spread, paying 1 on 30K (bought 20K last week, rolling along)

EDH0 99.00 calls, paying 4.5 on 20K (covering a short)

 

Things to Watch in Interest Rate Futures

#1 With news of potential tariffs being pushed back to December 15th, the Dec (EDZ9) expiration takes on even more significance. As it stands, the EDZ9 contract is the only Eurodollar contract that expires after the FOMC meeting (FOMC is December 10-11th, EDZ9 expire 12/16). Add to that a tariff deadline, and things could get very interesting. Currently, one of the largest positions in Eurodollar options is the 98.00/98.125 call spread vs. the 97.75 puts, buying the call spread for 3.25-4, +250K.

#2 With today’s CPI report, it’s worth mentioning that dealer positioning is mostly long calls/call spreads and short puts. The market has a lot of easing built-in, so we could certainly take some out. However, a big rethink of the Fed policy could be problematic for paper. At this point, it doesn’t seem like too many players are worried, as a 10+ tick selloff is viewed as an opportunity to buy more call structures.

#3 Futures are off their recent highs (in some cases, contract highs), but still quite a bit higher than we were a month ago. Certainly, one data point is not enough to alter the Fed’s course. But it’s worth noting the magnitude of our recent move.

 

About the Author

Albert Marquez works for Chicago Capital Markets (CCM) and covers Eurodollar & Treasury Options and Futures. Albert can be reached  on Twitter @STIR_Report or amarquez@ccmmarkets.com