Jan 19, 2018. What IF?

–At the December FOMC, the Fed’s FF projection for the end of 2018 was 2.1; in other words, three hikes this year.  Finally the Fed and the market are in sync, with both Eurodollars and Fed fund futures coming closer to pricing that outcome.  For example, Jan’19 FF settled 97.96 or 2.04, only 6 bps away from the Fed’s projection, while EDZ8 closed 97.685 or 2.315.  In fact trading sentiment is now shifting to the idea of 4 hikes this year, as evidenced by recent option activity.  For example, first thing yesterday morning there was sizable buying of EDZ8 9750/9725 put spread for 4.5.  Simplistically, if EDZ17 expired at 98.37, then 4 quarterly hikes would put EDZ18 around 97.37. (There was also a large buy of EDZ8 97.375p for 2.0.  Open interest up in all strikes, so new positions).
–What’s interesting about yesterday’s trade is that even with good size buying of EDZ8 puts, EDZ8/EDZ9 was able to close at a new recent high of 23.5.  There was heavy outright buying of the spread at 23.5; the next hurdle is 25, a high close from late October.  All near ED calendars made new highs, with the peak EDH8/EDH9 at 53.5.  Huge late buying of EDH8 at 9814.5 (+100k) caused the white pack to close positive on the day, with successively more negative closes further out (reds -0.75, greens -2.125, blues -2.875).  The ten year settled 122-14+ at the floor close, with 2.609 cash yield, but immediately thereafter fell to 122-11 with cash yield of 2.626, equaling last year’s high. Low so far today is 122-09.  While implied vol firmed slightly on the sell off, it’s still depressed.

–Despite a move to higher rates, USD is weakening.  What is not really occurring is a reach for out of the money puts.  For example, on the EDZ7 put spread mentioned at top, the 9725 strike was sold at 0.5.  These puts (EDZ8 9725) are 0.5 bid of course, but have traded that price.  The market assigns very little probability of ever reaching that level.  What’s sort of missing in general is the idea: ‘what if the crazy sonofabitch does THIS?’  Won’t happen…. ‘Yeah, but WHAT IF?’  The markets have given a pass to central bank authority and power to keep it all reined in, both economically and politically.  Today we have the looming gov’t shutdown.  Next week Davos.  Onward 2018…

Posted on January 19, 2018 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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