It’s Near Impossible To Pin Strikes In Butterfly Option Trades

Below average volume with floor leading the screen
Volatility mostly flat
Futures mixed, down in the fronts, flat to slightly up in the deferred contracts
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: October 17, 2019
 

Futures traded their range overnight as geopolitical news broke futures early and they began their climb back prior to the pit open. Economic releases did little to move futures in any meaningful direction as tighter ranges were seen for the remainder of the day.

Big Trades (last few days)

EDZ9 98.625 calls, paying 0.75 on 60K

EDZ9 98.25/98.375/98.50 call fly, paying 1.25 on 20K (see note)

EDM0 98.875/99.00/99.375/99.50 call condor, paying 1.5 on 10K

Short Dec (E0Z, EDZ0) 98.75/98.875/99.00 call fly, paying 0.75 on 10K

Short Dec (E0Z, EDZ0) 99.125/99.25 call spread, selling 50K at 0.5 (see note)

 

Things to Watch in Interest Rate Futures
 

#1 Once again, the biggest move was seen on geopolitical news, not economic news. And this has certainly been a theme for quite a while. Granted the overnight illiquidity probably exaggerates any reaction, but the fact remains that more clues seem to be coming from Twitter and not economic data numbers.
 

 #2 The EDZ9 call fly has been popular recently. I mentioned it before and the difficulty of trying to pin strikes, especially in December. So what exactly would we be looking at?

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Source: Bloomberg

Basically, we would need to see not only a 50 bps cut in rates but a pullback in FRA/OIS to something closer to the 25 bps level. Keep in mind that EDZ9 captures the December Fed meeting, so really it’s a question of where will FRA/OIS be at that point? Time will tell!
 

#3 The Short Dec call spreads were a bit of a head-scratcher. The assumption is that this is a liquidation. And if it is, then there’s not much more to it. But I don’t recall this trading, and certainly not for that type of size. In fact, the only time I can recall these strikes trading for size is back in early September as part of a 92/93/96/97 call condor (+2.5, 40K). Futures were trading near the top of their range at the time (98.87), so maybe trying to salvage some value? But selling the call spread for half a tick and leaving yourself open to being short the other call spread doesn’t add up. And establishing a position by selling a 12.5 tick wide call spread for half a tick is worse. Open interest may answer some questions…

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 amarquez@ccmmarkets.com