Negative Interest Rate Trade Most Likely Hedge and Not Opinion About Future Fed Policy

October 10, 2019 02:07 PM
Quiet overnight session in Eurodollar futures
Eurodollar options volume remains below average
Screen and floor volume relatively even
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: October 10, 2019

Minimal action overnight as futures trade in a tight range. That changed after the release of the September CPI data. Algos initially read the headline number as weak, and futures ticked up. However, core CPI, at 2.4% YoY, was the strongest reading since late 2008, and futures traded down to the bottom of the day’s range.

Big Trades

Short Jan (E0F, EDH1) 98.50 puts, paying 6.5 on 30K

Short Dec (E0Z, EDZ0) 98.375 puts, paying 4 on 20K

EDH0 98.875 calls, selling 20K at 5.5 vs 98.465

EDH0 98.25 puts, selling 10K at 7.5 vs 98.445

EDZ9 97.875 puts, paying 1 on 15K

Green March (E2H, EDH2) 99.50 calls, paying 2.5 on 15K (see note)

EDH1 98.75/99.00/99.125 call fly, paying 5.5 on 10K

Nov (EDX9) 98.25 calls, sold 20K at 3.25 (see note)


Things to Watch in Interest Rate Futures

#1 Interesting trade yesterday in the longer-dated contracts, as we saw a buyer of the Long Green (EDZ1-EDU2) par (100.00) call strip, paying 28 on 4000. On our initial move up, we saw a lot of buying in the 99.00-100.00 calls, mainly through call spreads and ratioed call spreads. But the call slope had a funny kink to it around the 95 strike, which insinuated that not many believed in negative rates and it made those 99.50-99.75 call spread 1x2’s not so great for the initiator. On this return to our high levels, we haven’t seen nearly as many deferred calls trading. Although small, this trade piques my interest and warrants observation.

#2 As I stated earlier this month, we haven’t seen a lot of action in the midcurves recently, especially the greens. The action has been mostly focused on the front quarterly contracts and their related serials. My guess for the lack of action revolved around the heightened volatility in these contracts, given the ability to swing from the day’s range extremes on one tweet related to China, for example. The other risk is the nature of these types of trades. The Green March calls are a good example. These look to be a hedge against something else, doubtful it’s expressing an opinion about future Fed policy. That means that whoever took the other side will have a tough time getting out unless the initiator decides to unwind. Not exactly a scenario that market makers would be excited to be involved in!

#3 Well, it looks like another edition of Short Attention Span Theatre. The EDX9 calls were bought on Monday, paying 5 vs 98.17. When these were sold, futures were trading 97.155. So that gives you an idea of what Volatility has been doing. These calls carry about a 30 delta.

Source: QuikStrike


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