Probability of December Rate Cut Drops to 12% On Strong Payrolls Number

November 1, 2019 02:07 PM
Futures lower across the board, Volatility down big
Large interest rate block trades overnight
Strong NFP number, Will the Fed pause in December?
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: November 1, 2019

There were some large block trades overnight, but futures moved in a relatively tight range prior to the NFP release. Futures hit new lows after a strong number gave credence to the idea of a pause in Fed action. Futures took another leg down and established day lows after more talk of trade war progress, closing just above those levels.

Big Trades 


Short Jan (E0F, EDH1) 98.375/98.75 risk reversal, paying 2.75 for the put, 80K (also traded 37K at 1.5, buying put, see note)

10 Yr Dec (TYZ9) 132 call, selling 75K at 3

Nov (EDX9) 98.00/98.125/98.25 call fly with the EDZ9 98.125 call, selling 25K at 12.5

April (EDJ0)/EDM0 98.625/98.875 call spread 1x2 stupid, paying even on 20K, buying the 1 leg in both

EDH0 98.75/99.125 call spread, paying 2 vs 98.36 on 25K


5 Yr Jan (FVF0) 118.75/120.5 risk reversal, paying 3.5 vs 119’055 on 40K

Short Jan (E0F, EDH1) 98.375/98.875 risk reversal, paying 0.5 for the put on 40K (see note)

EDM1 futures block, paying 98.59 on 40K

EDU0 futures screen trades, paying 98.53 on 20K and 98.495 on 18K

Things to Watch in Interest Rate Futures

#1 Interesting trade in the E0F. Traded on a block late Wednesday night, which has been a trend over the last week. Large block trades between 7:00-11:00 CST that usually give up a big edge. Originally I had thought that the subsequent screen trades were a continuation of the block trade, just at a better price. However, after further investigation, I decided that the later screen trades were the local on the other side getting out. The key was the wording of the block and screen trades. The block trade was called in as a “fence” which is originally a stock option strategy for protecting a position. An investor was long the stock, sells the calls and buys the puts. Therefore, the risky player sold the call and bought the put. However, the screen trade was listed as a risk reversal, which is the opposite of a fence. Learn something new every day!

#2 In a similar move, late Thursday we saw another iteration if the above trade. This time the player sold the 98.875 calls, probably just reflecting the move in futures. This leaves an overall position of being long 120K of the 83 puts and short the 87 & 88 calls. A pause in December and this position will be looking good as EDZ9 should expire closer to 98.00 and the rest of the curve adjusts down as well.

#3 A strong NFP number took the steam out of the Dec cut narrative.

A screen shot of a video game

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Source: Bloomberg

Assuming a pause in the cycle, then EDZ9 should expire somewhere closer to 98.00. Recall that there are a lot of positions in EDZ9 looking for a much higher expiration. For example, a big position in the 98.25/98.375/98.50 call fly, ~200K. In fact, most of the action in Dec has targeted the 98.25 or 98.375 strikes. Both would require another cut by the Fed in December and the 83 strike would require a contraction in FRA/OIS as well. The only solace is that they didn’t pay very much for the fly (0.75-1.0) and it’s still being quoted as 0.5-1.0 (futures reference 98.10), so not too painful. But don’t be surprised to see new position established targeting the 98.00 and 98.125 strikes. Because, after all, traders love to try and pin strikes!


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