Feb 16. Volatility deflates as curve flattens and dollar falls

–Curve flattened and long end vol was crushed on Thursday. April 10y vol back at just 4.5. There were some large put trades on near contracts, exit seller of at least 75k EDU8 9800/9775ps at 20..5, but a buyer of EDM 9775/9762ps, 3.25 for at least 40k, and buying of 0EM 9725/9700ps for 3.5 in 30k during the day.  EDH8 settled at a new low of 9797.5; a couple of weeks ago the atm EDH8 9812 straddle was sold at 3.75 which is now 15 intrinsically, and yet somehow people feel comfortable selling EDM8 9775^ at 13.0 with 123 days until expiration.

–Stocks rebounded, VIX back below 20.  It’s all getting back to “normal”.  Kuroda got another stint as the head of the BOF, with the added monetary turbo-boost of deputy Wakatabe, who advocates more aggressive easing.  It would be like handing the keys of the Fed to Kocherlakota.  On the other hand, $/yen fell; it hasn’t been this weak since we were afraid Hillary was going to be elected.  USD looking ever more vulnerable to a crash which should continue to underpin higher inflationary expectations.

–Market trades as if nothing can deter the Fed from near term ‘normalization’ but longer term growth and inflation will falter. 5/30 was over 62 on Friday,  but closed just below 51 yesterday.  Feb midcurves expire today in euro$’s.

Posted on February 16, 2018 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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