INTEREST RATE RECAP -Whale Trade Expires Worthless, Implied Volatility Back Near Highs

Futures higher, led by Reds (EDU0-EDM1)
Volatility back near highs after big move up
Once again, market reacts more to trade war rhetoric as opposed to market news.
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: August 23, 2019

Futures popped on tough rhetoric out of China earlier in the day, as market participants waited on Powell's comments. After Powell’s comments, futures edged higher. The final leg up came after Trump escalated the trade war issue with renewed venom aimed at the Fed and new threats aimed at the Chinese. Either the Fed gives in or China does, either way, it’s a win-win for Trump.

Big Trades

EDV9 98.25/EDZ9 98.375 call spread, paying 1 for EDZ9 on 35K (see note)

Short Dec (E0Z, EDZ0) 99.00/99.25, paying 3.5 on 10K

EDV9 98.25 calls, paying 7.5 on 10K (see note)

EDV9 98.50 calls, selling 50K at 2.75-3.75 (see note)

EDV9 98.50/98.75 call stupid (or call double), paying 5 on 20K (see note)

Things to Watch in Interest Rate Futures

#1 For the second day in a row, we had a player buying the EDZ9 calls to sell the EDV9 calls. At the time, I had speculated that this player had an opinion about the September and October meetings. With the benefit of hindsight, it seems like this player was also factoring the Trump factor. Powell’s comments make the market believe it’s a 25 bps cut in September, with a measured approach. Trump, not happy, comes out and makes a statement to influence the market and push for more accommodation (much like he did after the last Fed meeting). Powell stands firm, cuts 25 in September, October calls go out worthless. Trump ups the pressure as October meeting nears, Fed cuts again with the guidance of another cut in December. December calls in the money. Winner, winner, chicken dinner.

#2  Just to give you an idea of the volume that has gone through in the October 98.25 calls, volume was almost 600K from Tuesday to Thursday. Of that volume, about 400K was on the buy-side and about 200K on the sell-side. With event risk gone and a September cut of 25 bps looking like a good bet, it will be interesting to see if there are any strike adjustments over the next few weeks. We did see some more buying today, but other than the EDV9/EDZ9 spread we haven’t seen any throwing in of the towel yet.

#3 Also today, we saw some two way action in further out EDV9 calls. We saw a seller of the 98.50 calls, which appeared to be the same player as the 82 call buyer earlier in the week. You could speculate that it was a poorly executed legging of a call spread, but perhaps as simple as being emboldened by Powell to sell seemingly out of reach calls and take in some premium to make up for paying up for the 82 calls earlier in the week when futures were higher. We also saw another player buying the 98.50/98.75 call stupid (or call double, depending on which market you are more familiar with). These could be covers of short legs in the call spread that were bought earlier in the week. Either way, lots of action in the October contract this week!

And, The Outcome of "WHALE" Dovish Option Bet That Expired Today

Looks like our 10-year call buyer was a bit off on his 131.75 call buys (paying ’04-’05 on about 120K). Futures at 131’000, calls are cab-7 offer. Thanks for playing!



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