Feb 9, 2018. Cost of protection is going up

-SPX closed -3.755 as contagion from the VIX blow-up spreads.  Late yesterday I sent CDX IG attachment which shows a surge of increased demand for CDS protection.  Implied vol in treasuries exploded yesterday, for example, with a net change of only 4/32’s in TYM8, the  April 120.5 straddle went from 1’36 to 1’44, and was higher after the close on a huge block trade. Block details below.  With only 2 weeks to go, USH 144 straddle settled 2’34 (10.9), up from atm of 2’20 Wednesday.  Eurodollar midcurve straddles up a couple of bps yesterday.

–So we have the vix surge, falling stocks, and now added ‘insurance costs’ with both CDS demand and interest rate vol strengthening.  In addition, eurodollar futures reflect funding strains, with near contracts under heavy selling pressure.  EDM8 9787p bought in size of 150k yesterday at 8.0-8.5.  These puts settled at 7.75 vs 9785.5 with a huge drop in open interest of 158k.  (Shoulder tap to reduce risk?).  EDZ8 9737p bought in size of 70k 3.5 to 4.0, settled 4.0 vs 9760.5, but in this strike open interest rose 59k.

–Clearly, what appeared to be ‘contained’ is now seeping outward.  I mentioned HNA, the Chinese conglomerate yesterday, putting $4 billion of property in the US on the selling block (according to BBG).  This company had already been cut off from several banking relationships including HSBC, and was issuing short term debt at high rates.  It owns 10% of Deutsche Bank which has fallen to a new low of €12.61 today.  Volume is heavy; DB was near 17 in December.  Shanghai Comp has fallen over 13% since the end of January.

–Dudley yesterday referred to the fall in asset prices yesterday as “small potatoes”, which is another indication that the Fed isn’t going to be so quick to ride to the rescue unless data from the real economy deteriorates. Powell testifying before Congress on Feb 28.


-23916 TYH 122/120ps

-23916 TYH 122/120.5ps     put spreads as a package settled 1’62 and were sold at 1’60, appears to be a roll of longs into lower strikes

+62855 TYJ 119.5/118ps 22/64     (settled 22 ref TYH 120-28.5s)

all covered TYH 120-29.


Posted on February 9, 2018 at 5:02 am by alexmanzara · Permalink
In: Eurodollar Options

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