Huge Option Skew Moves In Eurodollar Front Months (EDU2020)

Volume improved, over 1.3 million contracts in Eurodollar futures and options
Futures and option volatility lower across the curve
Continued buying of upside with few variations
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: December 18, 2019

After touching session highs before the pit open, we saw a very orderly drift down in futures. No economic news and no Twitter bombs!

 

Big Eurodollar Option Trades

EDH0 98.50/98.875 call spread 1x2, paying 0.25 on 35K

EDH0 98.25/98.375/98.50 call fly, paying 1.25 on 25K

EDH0 98.50/98.875 call spread, paying 0.25 on 15K

EDH0 98.125 put vs 98.50/98.75 call spread, selling the put at 0.25, 10K

Short Jan (E0F, EDH1) 98.375/98.50 strangle, selling 10K at 6 (see note)

Short Feb (E0G, EDH1) 98.375/98.50 strangle, selling 10K at 11

EDU0 98.75 call, paying 4.5 on 10K

Green June (E2M, EDM2) 97.875/98.125 put spread vs Blue June (E3M, EDM3) 97.75/98.00 put spread, selling the E2M, 10K at even (see note)

 

Things to Watch in Interest Rate Futures

1) Quick turn around in the E0F. These were bought on Monday, paying 6.5 on 35K. Not exactly sure what the impetus was to sell these. The best guess is that they were expecting a quick move and didn’t get it, so they lightened up. Not much delta in that strategy, so that gives you an idea of what vol did in two days. Not sure if the E0G is related at all, but that traded shortly after the E0F.

2) First curve trade we’ve seen featuring puts in a long time! And the first action in the blue mid curves in a while as well. A bear steepener with stop losses isn’t necessarily that exciting, but just the fact that someone is thinking in that direction is interesting.

3) Tremendous skew moves in Eurodollars, especially the front months. Consider the EDU0 contract. With a futures reference of 98.35, look at the 98.25/98.625 risk reversal. The puts are 10 ticks out of the money and the calls are 27.5 ticks out of the money. That market was half around! So basically, valued at even money. With 270 days until expiration! This has been driven by the constant call and call spread buying, but also by the desire to buy or sell any structure that involves pinning the 98.25 strike.

 

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 stirreport@gmail.com.