ED Futures and Options Market Recap: February 18, 2020
Little new information out of China kept futures markets in check following an extended US weekend. Futures trended up overnight, then down into equity open and up again for the remainder of the session.
EDM0 98.875 calls, paying 2-2.25 on 150K (see note)
EDZ0 98.00/98.125/98.25 put fly, paying 1.5 on 50K (see note)
EDM0 98.50/98.625/98.875 call tree, paying 1 on 25K
EDM0 98.625/98.875 call spread, paying 3.5 on 70K (see note)
Things to Watch in Interest Rate Futures
1) Right out of the gates, we had a big buyer of June calls. With open interest of 400K+, it’s possible that it’s a short cover. However, I don’t remember any trades of similar size involving the 88 calls, nor do any of the locals I speak with frequently. As a quarterly contract, it could be a legacy position from when EDM0 was a red or green contract. It seems like it’s a new position. Recall that on our last “panic rally” Eurodollars were led by the EDM0 & EDU0 futures. This was due to short delta covering. The reports out of China are murky, at best. So many conflicting stories about the true impact of the COVID-19 virus making the rounds, which complicates trading decisions. It could very well be this player is concerned about another swift rally and is simply trying to get out ahead of it.
2) And for a change of pace, how about some downside? The Dec put fly looks to be a new position, focusing on downside protection. If it’s an expression of policy expectations, then it is certainly a contrarian view. In order for that to payoff, we would need to see the Fed stay on hold and FRA/OIS to widen back out quite a bit. Not impossible, but given the current geopolitical and public health backdrop, seems a bit of a reach.
3) Huge June call spread traded mostly on blocks. I would think that this is one of two possible scenarios. First, it could be buying the short spread from the 98.375/98.625/98.875 call flies from earlier this year (paid 2.75-3, futures reference 98.32-98.35). the second possibility is that it’s a new position, taking advantage of local positioning following the huge 88 call buyer. Open interest will give us a better idea tomorrow. Regardless, as EDM0 expires after the FOMC meeting this year, in order for the 98.625 strike to be in play we would need to see two cuts by that June meeting. That seems a bit outlandish, but so do a lot of things in this market!