Interest Rates Markets Shrugged Off Better Than Expected ISM Non-Manufacturing Report

Much improved volumes in eurodollar futures and options
Futures unchanged to slightly lower on the day
Eurodollar volatility mixed with front quarterlies higher and 1 Year Midcurves mostly higher
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: January 7, 2020

Futures traded in a range for the better part of the day, ending the session near their low. Markets shrugged off a better than expected ISM Non-Manufacturing number as the focus remains on geopolitical issues and the upcoming NFP number on Friday.

 

Big Eurodollar Option Trades

EDZ0 98.625/98.875/99.00 call tree, paying even for 1 leg, 20K (see note)

EDH0 98.375/98.625 call spread 1x2, paying 1 on 20K

April (EDJ0) 98.625/98.75 call spread, paying 1 on 20K

EDM0/EDU0 98.25/98.375 put spread spread, paying 1 for EDM0, 10K

April (EDJ0) 98.125/98.25 put spread vs 98.50/98.75/99.00 call fly, paying 0.75 for call fly, 12K

EDH1 98.00/98.25/98.375 put tree, paying 1 on 10K

EDM0/Short June (E0M) 83 put spread, paying 1-1.25 for the EDM0, 30K

 

Things to Watch in Interest Rate Futures

1) A flashback today as the EDH0/EDM0/EDU0 98.125/98.25/989.375 put fly strip was checked. Remember this trade? Paper started buying these back in November, paying between 7.5-8 on most and some additional at 10. The total position is around 150K. The current market, on the open this morning, was 15.5-16.5 with futures close to their levels of the opening purchase! There is some volatility in this strategy (entire strip is roughly equivalent to 1 at the money option), but the main driver has been the relentless selling of the 98.25 strike, creating massive skew moves. For example, the EDU0 98.25/99.00 risk reversal was even bid at 1 for the put with futures trading around 98.44. That means that the put is 19 ticks out of the money while the call is 56 ticks out of the money. Wow!

https://ccm.quikstrike.net/ChartImages/BANTIXWFENLB01/VSC_000037.png?0cb58b28-b214-4211-99ba-073fa286117e

 2) Return of the Mack? Could our Asian Hour Block Trader be back in action? Yesterday there was a buyer of the EDZ0 call tree (+0.5 on 40K) and again today. These trades were blocked overnight. In the past, these trades have been done more towards the Asian Market open. The last two days they were done closer to midnight locally, but the size and strategy suggest it’s the same player. The first trade was buying Short Dec (E0Z) put trees in October. We’ll see if this continues.

 

 3) The June/Short June trade suggests that even though the 98.25 strike is pinned in the front months, there is little conviction that we can go below the 98.375 strike before expiration. In fact, the Red contracts (EDH1-EDZ1) have one ease built in. Of course, that’s a long way off and we have an election before then too. But this player believes the next 6 months are pretty straight forward and this could pay off handsomely, especially if everyone is right about 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.