ED Futures and Options Market Recap: September 10, 2019
Futures continued their move lower, following equity strength on the back of China-related trade news. A lack of economic numbers and the Fed blackout period led to a lackluster trading session.
EDH0 98.00/98.125/98.25 put tree, paying even vs 98.38 for the 82 put, 15K
EDZ9 97.75/97.875 put spread, paying 3 vs 98.065 on 20K
EDZ9 97.875/98.25 call spread 2x3, selling 10K at 25.5
EDZ9 98.25 calls, selling 20K at 8
EDH0 97.875/98.00 put spread, paying 2.5 on 50K (see note)
EDH0 99.25 calls, paying 2.5 on 35K (see note)
Things to Watch in Interest Rate Futures
#1 I’ve written several times in the past about market positioning being biased to the upside (via long calls and call structures vs. short puts and put structures) and how any meaningful pullback could see increased interest in downside strategies. Well, we’re starting to see that now. Plenty of action in EDZ9 and EDH0, which is down almost 20 ticks from last week’s high. It would seem that many players are adjusting their views for the upcoming FOMC meeting and moving towards a 25 bps expectation. But, at the risk of beating the proverbial dead horse, market participants are short a lot of puts and culling risk before a potential panic, regardless of the odds, is never a bad idea.
#2 On the flip side, we still have some players taking advantage of the pullback to add to existing upside long positions. In the EDH0 99.25 calls, for example, open interest has more than doubled (165K to 340K) over the last couple of weeks. The question is, why? That’s a long way away in a relatively short time. And that’s a bit of premium too (4 ticks on 200K is $20M). Typically you would see some 1x2’s or call spreads to help finance the purchase. Buying outright makes me feel that this is more of a risk management satisfier than an expression of rate policy forecasts.
#3 Volatility has come off its recent highs, as market participants wait for the Fed next week. Most of the action has been in the EDZ9 and EDH0 related expirations. The move is not surprising given the recent trend of futures down, vol lower that we have been seeing. Also, call slope has reverted somewhat to a more normal curve as we move lower, and less of the kink we see in 99.375-99.625 strikes as we rally. The focus will turn to any guidance we get from Powell and company, but positions, at least for now, indicate plenty of rate cuts ahead.