Feb 9. Treasury option recap
Interesting week in treasury options, centering on early put buying in TYH 125 and 125.5 puts. Vol ends soft across the board, further compression expected. However, the drop in the unemp rate to only 6.6% may force the Fed into a more qualitative assessment of forward guidance, essentially weakening it, perhaps supporting a bid in downside put skew.
One week ago Friday, TYH 126.0 straddle settled at 1’16 or 5.4 with TYH 125-24. Last Friday TYH 126 straddle settled 0’62 or 5.3% with futures 125-31, a change in futures of just 7/32’s over the week. The premium decay is not that surprising of a result, given 2 weeks until expiry, and that employment data was released with the establishment survey weaker than expected. The interesting part was the vol surge in the early part of the week.
On Monday, there was a buyer of approximately 125k TYH 125 puts (as tens rallied and stocks sank), and on Tuesday another 50-60k TYH 125.5 puts were bought, taking the TYH 126 straddle to 1’25 or 6.4% as of Tuesday’s close. But as mentioned above, weak NFP catapulted the TYH contract just above the 126 strike and took the straddle back down to 0’62 or 5.3%.
There was heavy trade in the 125 puts of 88k on Friday, what appeared to be liquidation, but open interest only fell 12k to 187k. This put is still the largest OI of any TY option. Settled 10 on Friday, 21 delta.
There was consistent selling in TYK 124.5 straddle over the week. On Tuesday, 2’34 to 2’33. On Thursday it was sold at 2’27 and finally on Friday the settle was 2’16. A loss of 11% of straddle value in just a few days.
It was the same story in Eurodollar options. Blue June 9750 straddle trade 55.0 on Tuesday and settled Friday at 51.0. Short June midcurve 9950 straddle trade 21.5 on Thursday and settled 18.5 on Friday. Of course, the end of week rally in stocks was equally unkind to premium longs as VIX sank from almost 22 on Monday to just above 15 Friday.
The market has been constantly fine tuning the point at which time rate hikes are expected to start, having recently pushed forward that time frame to late 2015/ early 2016 as evidenced by massive long positions in Green March midcurve put structures. This idea was equally conspicuous in the curve as the red/green/blue pack butterfly moved from -30 in early December to a high of +6 in mid January. (In other words, the spread between reds/greens moved higher relative to greens/blues as the tightening schedule was moved forward by the market). Weak mfg ISM and payrolls pushed thoughts of tightening further away, as red/green/blue pack fly closed back down below -11 on Friday, and red/green pack spread made a new monthly low settle of just under 93. So the Green midcurve puts that had been heavily in play in terms of a late 2015 tightening schedule, withered on the vine by the end of the week. 2EH 9850 puts still hold the most open interest with 260k positions, but settled at just 1.75 Friday, 34.5 bps out of the money. 9862.5 puts settled 3.75 with a 22 delta, now 22 away from the money. Expect these puts to be under continuous pressure, as it’s hard to imagine Yellen being anything but generous in terms of liquidity projections at this week’s Congressional testimony, what with mixed US data, emerging market stress, and US equities that didn’t completely recover their footing on Friday. The overhang of long puts in TYH should likewise keep pressure on the treasury complex.
