It was a quiet week with most market participants watching the drama unfold in the oil market. Eurodollar futures had tighter ranges throughout the week, with EDM0 being the exception as it continues to move based on short term funding concerns. For example, EDH1 had a 2 tick range on the week, while EDM0 had a 13 tick range. Options activity was equally biased, with most of the attention on the front of the curve. A slightly better than expected jobless claims number was the “silver lining” on Thursday, even if it was still severely tarnished.
EDM0 99.125/99.375 put spread 1x2, paying 1.25 on 10K
EDM0 99.00/99.125 put 2x1, paying 0.25 on 50K
EDU0 99.50/99.626 put 1x2, selling 2 legs for 0.75-0.50, 25K
EDM0 99.625/99.75 call spread, paying 4.25 on 18K
EDH1 99.25/99.50/99.75 put fly, paying 4.5 vs 99.69 on 11K
1. As always, attention is on EDM0 and trying to pin the strike. Most strategies have looked at the 99.25-99.375 strikes. No different here with the put spread 1x2 buyer. But we also had a call spread buyer on Friday. This would seem to go along with the reports we’ve seen out of some of the big banks over the last couple of weeks. One house says Libor and FRA/OIS stay elevated, so get short EDM0. Another house looks for FRA/OIS to contract to 25 basis points by June, so get long EDM0. Not sure who is right, but right now it’s the only game in town.
2. Looks like the September 1x2 buyer doesn’t agree. With a breakeven of 99.365, this trade looks for EDU0 to drift down towards the level of EDM0, but not much more. With only a couple of weeks left until the EDK0 expiration and EDM0 set to potentially be the first contract to expire after the lockdown expires (at least in Chicago), it will be interesting to see how sentiment changes. Right now, most of the action in Eurodollar options is centered around Libor and FRA/OIS levels, since that’s about the only thing that’s quantifiable by traders. September is a long way off, at least in terms of option risk, This trade would seem to foretell the story of a post-quarantine landscape where attention moves from lockdowns to cleaning up the financial mess left behind and the stress that will create in the funding markets.
3. The EDH1 fly looks like an add. Last week someone paid 3.5 on 60K (futures reference at 99.71). So this gives you an idea of what has happened to skew over the last week.
With futures nearly unchanged (and small delta for the strategy) and minimal vol in this strategy, the move in put slope has made this a bit more expensive since last Friday.