Jan 20. Weekly interest rate option note

Net weekly changes in interest rate futures were marginal, with the ten year edging up and fives slightly lower.  In Eurodollars, greens were lower by 2 bps, while blue and gold packs were 1 bp higher.  S&P futures were also nearly unchanged on the week.  Despite lack of net change from Friday to Friday settlement, there was still a significant amount of option activity, primarily in midcurve puts on EDH16 and EDM17 contracts.

Where changes did occur was Aussie dollar which fell 2.4% on the week to new lows, and EUR which was down about 1% to 135.40.  The dollar index had its strongest close in a month; surprisingly, so did gold.

The ten year yield has been in a range of 2.50 to 3.0% for fully six months and closed the week nearly at the midpoint of 2.82.  It’s hardly news that implied vol in treasuries remains anchored to the low of its range with TYH at 4.6 and TYJ at 4.8.  Similarly VIX has a gravitational pull tethering it to the 12 handle.

On Friday, February treasury options expire.  With futures having settled at 124-13.5, the 124/125 strangle closed at 9, 3 for call and 6 for the put.

Where we do note an interesting divergence on the week (small though it might be) is in the red/green/blue pack butterfly in Eurodollars, which closed Friday at +1.75 bps vs previous Friday at -2.125.  What is the signal?  It’s that the green pack is being pressured relative to the rest of the curve.  Beneath the modest net change in the fly was an absolute avalanche of activity in green midcurves which I detail below.

By way of background, as the ten year yield steadily rose through the month of December from 280 to 300, the aforementioned butterfly actually had a larger magnitude move in bps, running from -35 to 0.  (On 2-Dec, red/green was 80 vs green/blue at 112, now 102 vs 100). Since the weak January employment report, tens have essentially gone the round trip, right back to 282.  The red/green/blue fly on the other hand, remains near its high.

The large trades on the week were mostly done on Thursday, for example, 2EH 9862/9837/9812 put fly bought about 30k and on Friday 2EJ 9825/9787/9750 put fly bought in size of 50k for 7 to 7.5. (2EJ expires April 11 on EDM16 contract, so it captures March FOMC).  The net position in Green March is mostly long 9862 and 9850 puts, short 9837 and 9825 puts and long 9812 and 9800 puts as protection.

The 9850-9812p condor settled 2.0.  9862/9812p fly settled 5.5.  Open interest levels are as follow with EDH6 9856 and EDM6 9827.5:


STRIKE          SETTLE          OPEN INT

2EH     9862p              17.25               137k

2EH     9850p              11.00               211k

2EH     9837p              7.25                 226k

2EH     9825p              4.50                 248k

2EH     9812p              2.75                 180k

2EH     9800p              1.50                 151k


2EJ      9825p              18.50               50k

2EJ      9787p              7.00                 103k

2EJ      9750p              2.50                 51k


If the ten year note should continue to press to a lower yield, (perhaps testing the lower bound of 250?), then green contracts should see a nice pop relative to the rest of the curve.  Call for trade ideas.

Posted on January 20, 2014 at 6:03 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply