Treasury Futures Pullback On Stock Close After Spending All Day Bid Higher

January 30, 2020 03:00 PM
Eurodollar options good volume across venues, over 1.5M contracts traded
Eurodollar Rate Futures and volatility much higher
Markets continue to focus on and react to virus rumors & news
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: January 30, 2020

A relatively quiet overnight session led to a similar pit open as traders digested the mostly benign FOMC results. That all changed as news and rumors trickled out about the Wuhan virus, hitting its peak as the first US person-to-person transmission was reported in the US. Futures moved steadily higher throughout the session, closing near the day’s highs.

Big Trades

Wednesday:

EDU0 99.00 calls, paying 3.5 on 20K (see note)

Short June (E0M, EDM1) 99.25/99.75 call spread (2x) vs EDM1 99.50/99.75 call spread 1x2 (3x), paying even for the EDM1, 20K. (see note)

EDZ0 99.125/99.375 call spread 2x3, paying 2.5 for the 2 legs, 10K

Thursday:

EDM0 98.125/98.25 put spread, paying 1 on 45K

EDM0 98.625/98.875/99.125 call fly, paying 1.5 on 25K

EDU0 98.375/98.50 put spread, paying 6 on 30K

EDU0 98.25/98.375 put spread 1x2, paying 2 on 35K (see note)


 

Things to Watch in Interest Rate Futures

Things to Watch

1) Still buying Sep calls. Since the beginning of the year, paper has been buying a lot of the EDU0 98.875 and 99.00 calls. They started buying the 90 call first, paying 3. Then futures ticked down a bit and they were able to pay 3 for the 88 calls. It appeared that this particular player was price sensitive. Then they decided, “Heck, instead of paying 3 for those calls, let’s just buy the 88/90 call stupid!” Which they did, paying 5 ticks. Obviously this has worked out well for them. The current market for the call stupid is 11.5-12.5. Best guess, based on the price sensitivity, is that these were hedges against something else. So it looks good on the surface, but what’s the other leg look like?

2) Huge trade on the close yesterday in Short June/Red June. At the time, it looked like this was a roll, getting out of E0M and into EDM1. Today’s open interest would support that. I seem to recall the E0M being put on last summer. Guessing that this player was adjusting their theta risk and ratioed the trade to keep capital outlay at zero. But buyer beware. That’s a long way off until expiration and if we go up there, volatility could be bid taking some of the luster off that 1x2.

3) The EDU0 put 1x2 has the flavor of many recent trades trying to pin strikes in the front expirations (such as the 81/82/83 put fly strips we’ve discussed before).  But this may be the wrong focus. Take a look at the Bloomberg World Interest Rate Probability graphic:

A screen shot of a computer

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Source:Bloomberg

There’s a full rate cut (and then some) priced in by September. Which means they should really be looking more at the 83/85 put 1x2. However, if the Fed does stand pat, then this trade looks pretty good. A lot can change between now and September, especially given the current backdrop of a viral outbreak, but someone is going to be wrong.

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.