March 11. Eurodollar option put buyers in front of next week FOMC

March 11.  There was a tremendous amount of put structure buying yesterday on EDH11 and EDM11.  Open interest in midcurve puts on EDM11 (short Apr, May.June) was up 240k contracts.  A big chunk was additional purchase of 20k EOM 9837/9800/9762p fly for 5.5 (80k).  The point is that some players are setting up for downside.  It might be that some expect a change in tone at next week’s FOMC, but these appear to be longer term plays.  Obviously we have seen a LOT of midcurve puts expire worthless over the past several quarters, and the odds are that these plays will meet the same fate, but the sheer size is worth noting.

–The other thing to mention is that vol is relatively low.  With good reason I might add, as historical vol in tens is in relentless decline.  However, if there were to be a downside move, it might get violent.  I would lean toward the idea of put 1x2s (long wings), rather than butterflies on reds.

–The curve edged slightly flatter in spite of 10 year auction.  30 yr bond today.  Mixed news on govt budgets.  US ran $221B record deficit for Feb, but CA revenues were better than expected. Last year the economy was in a death struggle, so yoy comparisons are going to look fantastic. 

–Copper was weak yesterday, as was gold (rumor of CB selling).  Copper, oil and SPX have very similar charts, but copper seems to be diverging here; no conclusions to draw, just noting.

–Also, China CPI was +2.7% last month, raising the prospect of more assertive tightening.

Posted on March 11, 2010 at 4:58 am by alexmanzara · Permalink
In: Eurodollar Options

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