Interest Rate Recap: FOMC Rates Appropriate Unless Material Change, Phase One Trade Could Stretch Into 2020

Eurodollar futures and volatility higher
STIR Eurodollar options volume slightly skewed to floor action vs screen
More big overnight interest rate block trades
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: November 20, 2019

Futures traded in a tight range of about 4-5 ticks as there was little news to move the market. The focus stayed on impeachment hearings, but futures caught a slight bid late as traders digested FOMC minutes, closing near the top end of the range.

 

Big Eurodollar Option Trades

Short Jan (E0F, EDH1) 98.75 call (3x) vs Short Feb (E0G, EDH1) 98.50 call (1x), selling the E0G for 1, 40K (see note)

Green Jan (E2F, EDH2) 98.25/99.00 risk reversal, paying even for the call, 17K

Blue Dec (E3Z, EDZ2) 98.25/98.75 risk reversal, paying 1 vs 98.51 & 98.505 for the call, 35K

EDH0 98.00/98.125 put spread with the 98.25/98.375 put spread as a stupid, paying 8 for 20K (see note)

EDM0 98.25/98.375 put spread vs 98.50/98.75 call spread, paying 1 for the call spread on 30K

 

Things to Watch in Interest Rate Futures
 

1) More Asian hour Eurodollar option block trades! And as always, done in blocks of 40K. These were actually liquidations. The E0F calls were a result of buying the 98.375/98.75 risk reversal, paying 2.5-3 for the put. The E0G was from a variety of call structures. The resulting position in the E0F will be long the 83 puts and in the E0G it will be short 120K of the 87 calls and short 40K of the 88 calls.

2) The EDH0 put structure went against the grain today as most of the activity was buying calls. Tough to say if this is new, but there has been plenty of activity in these strikes over the past few weeks. In fact, buying the 82 puts flies directly in the face of what we have seen recently, as the big put fly strip buyer (EDH0/EDM0/EDU0 98.125/98.25/98.375 put fly strips, approaching a total position of 100K) views the 82 put as the “dead strike” in 2020.

3) Speaking of going against the grain, the EDM0 player isn’t buying what the put fly buyer is selling either. This trade is looking for 25-50 bps additional cuts by June 2020. At first, I thought it was an inventory shift type of trade but couldn’t find anything that would fit that description. Another tell is that this player used a 12.5 bps wide put spread to fund a 25 bps wide call spread, limiting their downside exposure if they are wrong. Regardless of the intent, locals were more than happy to help out as they had an opportunity to buy back some put spreads after getting short so many put flies!

 

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