ED Futures and Options Market Recap: October 8, 2019
 

Futures traded on their lows for the session prior to the pit open. After a disappointing PPI release, futures moved progressively higher throughout the trading session, closing off mid-morning highs.
 

Big Trades
 

EDH0 98.875 calls, selling 40K at 6 vs 98.48

EDZ9 98.625 calls, paying 1.25 on 80K (see note)

EDM0 99.375/99.625/99.875 call fly, paying 2 on 20K

EDH0 98.00/98.25 put spread, paying 4.5 vs 98.525 on 40K (see note)

Things to Watch in Interest Rate Futures
 

#1  Lots of flow in EDZ9 calls recently. Especially the 98.625 strike. But at times it can be hard to get a handle on the situation with regards to intent. One day, after big volume, open interest will fall. And that’s not surprising, given that paper had been long these from a variety of structures. Then, on another day, open interest will rise. So, there has been quite a bit of a 2-way flow in these calls. Today’s action looks to be a cover based on the players involved.

#2 The predominant flow in Eurodollar options in recent memory has been buying calls and selling puts. Seeing the large EDH0 put spread would seem, on the surface, to be an outlier. A renegade player who pays no mind to the doom and gloom of the market pundits flooding the airwaves. But alas, it doesn’t appear to be so. Paper sold a lot of these to finance buying the 98.875/99.25 call spread (paying even-1). There’s your conviction. Not only are they buying calls and selling puts, but also covering short put positions on upticks in futures.

#3 On our initial runup in futures, we saw a lot of ratioed call spreads being bought, especially in the deferred expirations and in the 99.00 strikes and up. But a funny thing happened with call slope, and we’re seeing it again.

Source: QuikStrike

This is EDU0, which is where this call slope formation starts. I wrote about this quite a bit on the initial move. Basically, those 99.50-100.00 calls are getting slammed in anticipation of stagnant Fed policy if we make it to that point. More importantly, it also shows a lack of belief in negative rates as well. The first time around, when paper came in to buy 99.50/99.75 call 1x2’s, astute market participants quickly took the other side and did quite well. This time around, we haven’t seen nearly as many 1x2’s go through. Fool me once…