Heavy short end option flow

March 28, 2019

–A lot of attention has been given to the EDZ9 9750/9737/9725/9712 put condor which was bought yesterday in size of 200k from 3.5 to 4.0.  Settled 4.0 vs 9764.0.  Breakevens 9746.0 and 9716.5 (from settlement).  Max gain at expiry of 8.5 occurs between the middle two strikes.  If the Fed doesn’t ease this year, the trade will perform.  Even on one ease and a libor/ois surge, the trade could make money.  I think it’s also worth noting a tremendous amount of upside plays occurred yesterday, notably in red Dec midcurves, 0EZ0.  Example, a new buyer of 67k 0EZ 9862/9887 c spds, which settled 3.0 vs 9798.0 in EDZ0.  A new buyer as well of 50k 9850/9900/9912/9962 c condors which settled 4.75.  There was selling (over 20k) in 0EZ 9737c which settled 12.25.  0EZ midcurve calls added 367k in open interest yesterday.  The point is, there is 2-way trade, but even separate option flows tend to reinforce the theme of calendar spread inversion.

–EDZ9/EDZ0 did not settle at a new low, though it’s close to it at -34.0.  The nadir of one-year calendars is EDM9/EDM0 which settled -42.0 bps, down 2.5 on the day.  The idea of rate cuts is gathering steam.  In Fed funds, I look at the May/July spread in an attempt to isolate odds of a cut at the June FOMC meeting, and August/Oct to isolate odds for the Sept FOMC.  The former settled -6.0 (about 25% odds of a cut at that meeting), and Aug/Oct settled at a new low of -10.0, indicating a 40% chance of a cut at that meeting. New high settle in FFF0 at 9791 indicates more than one ease this year.

–There was a report yesterday on CNBC of a “confidential” ESRB document that cited Brexit, Italy’s banking system, and trade tensions as risks to financial stability in the EU.  Duh.  Might as well throw in the yellow vest movement.   EUR currently 1.1250 nearing the year’s low of 1.1178. A new round of USD strength may yet create problems in EM.  In any case, the bund yield is sinking into the quicksand of negative rates as shown in the lower chart,  though it should find support around -10.  Top chart is of US ten year.  

–7 year auction today.  A few Fed speakers, the most important of which is likely Clarida on a panel discussion.

Global Shocks and the U.S. Economy

At the Banque de France and European Money and Finance Forum Colloquium, Paris, France

Posted on March 28, 2019 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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