Overall Eurodollar options volume has been lower over the last couple of days as most attention was focused on the oil market. Futures trade in tight range over first part of the week, EDH1, for example, had a 2 tick range over the last 3 days. The front expirations (EDK0 & EDM0 futures) have wider ranges as funding concerns continue to ebb and flow.
EDM0 99.00/99.25 put spread vs 99.625 call, selling call for 1, 25K
EDM0 99.125/99.25/99.375/99.50 put condor, paying 2.5 on 40K
Green July (E2N, EDU2) 99.625/99.75/99.875 call fly, paying 3 on 25K
EDM0 99.25/99.625 risk reversal, paying 0.75 for the put, 20K
EDM0 99.25/99.375 put spread, paying 2.5 on 20K
EDM0 99.00/99.125/99.375 put fly (2x3x1), paying 2.5 on 11K (+22K x -33K x +11K)
EDU0 99.875/100.00 call spread, paying 0.75 on 20K
EDM0 99.125/99.375, paying 3.75 vs 99.505 on 10K
May (EDK0) 99.375 put vs EDM0 99.25 put, paying 1.25 for June, 42K
May (EDK0) 99.50 put vs EDM0 99.35 put, selling EDK0 at 1.5, 30K
EDM0 99.625/99.75 call double, paying 4.25 on 20K
1. The main focus of the week has been continued pricing of Libor and FRA/OIS widening in the June contract. Almost all of Monday’s action revolved around trying to pin lower strikes. You can see the effect on skew over the last week.
The focus has been the 99.25-99.375 strikes. With May futures trading at 99.38, the feeling is that these rates will go lower before the June 15th expiration. In fact, a few houses issued reports this week encouraging shorts in June Eurodollars. Stay tuned!
2. The big trade on Monday was the June put condor. Again, looking for a move to the 99.375-99.25 strike range. Not a remarkable statement, but what I do like is that it’s at a sweet spot for price. All too often market participants look to purchase low premium strategies that pay off in a big move. On the floor we sometimes call them lottery tickets. But, if you don’t get that big move, then they end up worthless. When you start getting into the 2.5 tick range, then you are usually paying double. But it’s the optionality of these trades that make them much more attractive. It may not be the right call, but you may only be risking 1-1.5 ticks if it moves against you because those lottery ticket buyers will always be out there.
3. The Sep call spread marks the first time I can remember the 99.875 being bought. This would represent a view on negative rate policy in Q3. It could also be that this is the rolling of a strike, as we did see a buyer of the 99.625/99.75/99.875 call fly last month (paying 4.5 on 40K). But futures haven’t moved much, so why pay up for an extra 12.5 ticks? Of course, at 0.75 ticks it may just be a cheap upside hedge. Either way, with so many narratives in the world right now, it’s important to keep an eye on these types of trades. Just because we’ve never had NIRP, doesn’t mean we won’t.