Feb 16. Interest rate option summary
The action still centered around TY options in the week just passed, though primarily in the form of liquidation. Two weeks ago, on the last day of January, TYM settled 124-03.5 and TYJ 124 straddle settled 1’57 (5.7). On Friday, TYM settled 124-01 and TYJ 124 straddle at 1’26 or 4.7. TYM range over the past week was only 123-16 to 124-16 in spite of Yellen testimony, treasury auctions, Retail Sales data (weak) and Industrial Production (similarly weak).
In the first week of February, there was heavy buying of TYH 125 and 125.5 puts, sending TYH vol as high as 6.4 and April up to 5.9. Stocks sold off as emerging market fears surfaced, and employment data was yet to be released. Vol was marked down immediately after the weak employment report. On the following Tuesday, TYH 125 puts were rolled into TYJ 123 puts in size of about 30k; TYJ 123.5 puts were also bought. However, on Thursday, TYJ 123 and 123.5 puts were sold (80k of TYJ 123’s), along with TYH 125.5 puts, an apparent capitulation with respect to further downside in tens. (I haven’t seen a bet ceded that quickly since Kramer in the ‘Master of My Domain’ episode). However, it could also be that the long put play was in conjunction with underlying cash longs, in anticipation of a further stock market rout. This scenario didn’t play out either. VIX, which had shot up to nearly 22 in the very beginning of the month, is now around 13.5, with near contracts in the VIX curve continuing to lose value against the back.
Having taken out the weekend, I marked both April and June TY vol at 4.7, 1’26 in the April straddle and 2’24 in June (originally settling 2’26 on Friday but marked even lower). News is fairly sparse next week. Fed minutes on Wednesday. Inflation and housing are the main releases on Wed, Thursday and Friday.
In Eurodollars, vol fell as well. There is consistent selling in red midcurves, notably Short June 9950 calls (though week to week change is 0EM 9950^ was only 0.5 from 18.5 to 18.0). There was a large exit early in the week of 0EU 9900/9850 put spreads, 40k sold 6.5 to 6.0. Further back, green to blue midcurve straddles remain close in premium levels, with both decaying near the same rate. For example, the previous Friday 2EU 9825 straddle settled 63.5 and 3EU 9725 at 68.0 (spread of 4.5). On Friday, 2EM 9825^ 60.5s and 3EM 9725^ 64.5s (spread of 4.0).
As mentioned last week the big open interest remains 2EH 9850 puts and 2EJ 9825 and 9812 puts (long) vs 9800 and 9787 puts (short, but on ratio). Respective OI 92k, 90k, 195k and 128k. Short delta, but capped and conservative. With Feb midcurve expiry Friday, 491k Green Feb midcurve disappeared.
