According To Fed Funds Futures There Is A 92% Probability That The Fed Will Cut Rates By 25 Basis Points

Low overnight volume
Quiet session with below average volumes
Futures trade in tight ranges, with most contracts fluctuating about 4-5 ticks
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: October 22, 2019
 

Minimal activity overnight, which carried over into the day session. No major economic numbers to move markets as traders wait for next week’s FOMC decision.


Big Trades (last few days)
 

From Monday: Short June (E0M, EDM1) 98.25/98.50 put spread 1x2, selling 2 legs for 0.5, 45K (see note)

Green Nov (E2X, EDZ1) 98.875 calls, paying 1.5 on 15K

EDH0 98.00 puts vs Green March (E2H, EDH2) 98.00 puts, paying 2 for E2H on 30K

Short Nov (E0X, EDZ0) 98.625/98.75 call spread, paying 2.5 on 40K

 

Things to Watch in Interest Rate Futures
 

#1 Slow going as of late. The situation is also reflected in options volatility:


Source: Quikstrike

Certainly, the bulk of market players are waiting for the Fed. But with vol at these levels, I would expect to see cheap directional plays and prudent risk culling.
 

#2 Interesting trade in the Short June yesterday. All new open interest according to today’s numbers. Best guess is that this player is saying that if we drift lower, vol comes in quite a bit. Tough to argue that logic, especially with the Short March version trading around 2 ticks for the 1 leg. Also, as I have said before, we haven’t seen a lot of midcurve options trading volume compared to the front quarterly expirations. Then again, midcurve volatility relative to the fronts is not nearly as low. Not bad, especially considering they got paid to do the trade.
 

#3 Next week is the FOMC meeting. The view of this meeting has fluctuated quite a bit recently:

A screenshot of a video game

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Source: Bloomberg

Weak numbers at the beginning of October pushed expectations back up to their highs. A cut at this meeting would be the first October action since 2008, but the second “Non-Quarterly” meeting cut this year. The Fed set that possibility up last year when they announced that every meeting would feature a press conference. Either way, it seems that expectations are set for a cut (see Eurodollar volatility) and the real question will be in the forward guidance. With volatility near or on its lows and a Dec contract (EDZ9) that actually covers the FOMC in December (FOMC 12/11, EDZ9 exp 12/16), it could get very interesting!

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