INTEREST RATES - Hedge Funds Chasing Upside Eurodollar Call Option Structures

August 29, 2019 02:05 PM
Low volumes over night, less than 50K contracts traded prior to the pit open
Futures moved steadily lower throughout the session
Pit volume about 5x screen volume
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: August 29, 2019


Futures opened lower and barely noticed a bevy of economic data that was realized shortly after the open. Action again focused on upside structures.


Big Trades

January (EDF0) 98.125/98.25 put spread vs 98.875/99.375 call spread, paying 1.75 for the call spread, 40K (see note)

EDZ9 98.125 calls, selling 20K at 17

EDZ9 98.25 calls, selling 20K at 12.5

EDH0 99.25 calls, paying 4 on 40K

EDH2 99.50/99.75 call spread 1x2, selling the 2 legs at 3 (see note)


Things to Watch in Interest Rate Futures

#1 Once again, we saw continued action in the January expiration. The same basic premise, buying call spreads and selling put spreads. Open interest has exploded this week, increasing by about 300K in the calls and 150K in the puts. Here’s a look at the overall position:

ED Rates
Source: Quikstrike

As I’ve stated before, it’s interesting that they are expressing their opinion through the January contract. Best guess at this point is that they want exposure to the EDH0 contract, but want the cheaper prices inherent to the first serial and they want to avoid any year-end funding shenanigans that are typical of the December contract.

#2  Earlier this month we had a buyer on the EDZ1 99.50/99.75 call spread 1x2, paying 0.5 on 100K. Today, we saw our first action EDH0. Paper has been building positions in these deferred contracts for a while now, especially in the 99.00-100.00 strikes.

Don’t be surprised to see more of the EDH2 in the coming days. In fact, although the timing of the foray into EDZ1 wasn’t great (futures, volatility and call slope all higher since initiation), this player probably still believes we aren’t going much higher and sees this as an opportunity to sell the two legs for credit now.

Eurodollar Options Update

#3 Speaking of call skew, we’ve always been taught that put skew and call skew move inversely to futures movements. In other words, as we move up in futures, call skew comes in. That hasn’t been the case recently. As futures moved higher, so did call skew. In fact, this is how a lot of locals got hurt earlier this year. Now, we have the “S” shaped skew, where market players are trying to say we are going to a certain point and stopping. As always, people will never stop trying to pin strikes in Eurodollars, regardless if it’s been profitable in the past or not!

About the Author

Albert Marquez is a Chicago-based options and futures broker, specializing in interest rates. You can reach Albert on Twitter@STIR_Report or