August 24. Change in the trend of risk

–On Friday, all near eurodollar calendar spreads made new lows as stocks tumbled and the Fed quietly exited through the side door.  With global carnage continuing early Monday, the prospect of a Fed hike this year is evaporating.  The peak one year calendar spread is March’16/March’17, now only 68.5, down 4 on Friday’s session and probably headed for the mid-fifties.  Red/green pack spread is just 54.375, a slight new low.
–Some of Friday’s stock market selling was associated with August option expiration, but the global nature of weakness in both equities and commodities makes it feel much less technical in nature and more like a change in trend.   Last year’s mid-October plunge was reversed within a few weeks.  While we’ll likely see a bounce sometime this week, it will serve as a selling opportunity.  The increase in corporate bond spreads foretold a change in risk appetite and it’s not over yet.
–During late June when the markets were fixated on the possibility of grexit implied vol in TY jumped to 6.2.  Greece is a small issue when considered against a collapse in Asia, yet ten year vol only went to about 5.6 last week, even as VIX soared to 28.  Probably not bad to own some insurance in the form of option premium, either in treasuries or back midcurves.

Posted on August 24, 2015 at 5:03 am by alexmanzara · Permalink
In: Eurodollar Options

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