Jan 25. End of week comment

A confluence of factors regarding emerging market problems sent interest rate futures screaming higher into the end of the week, with green and blue Eurodollars up 30 bps from Wednesday low to Friday morning high, though Friday’s settlement was about 8 off the high.  Though implied vol typically declines on rallies, the abruptness of this move caught the market off sides and vol ended the week on its highs, with TY vol up 0.5-0.6.  Fives made a new monthly high, closing 3.4.  The scramble for safety was punctuated by a buyer of 50k TYH 125c on Thursday, though the same call was liquidated Friday.  Open interest in Eurodollar futures was down a whopping 123k on Friday, with Z4 -37k, M5 -15k, H6 -25k and M6 -12k; another indication of unexpected liquidation.  The story in the US has shifted from the domestic economy to international capital flows.  As noted by Doug Noland of the Prudent Bear, “Backdrops conductive to crises can drag on for so long – sometimes seemingly forever – as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where newfound momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared.”

Green and blue at the money straddles were extremely well bid on Friday, with Green Feb 9862^ closing up 2 at 21.0 and Green March up 1.5 at 29.0.  Feb and March atm straddles in blues are 22.5 and 32.5.  As noted previously, green to blue straddles are nearly trading at parity.  If the upside move continues we may start to see blues leading the way…  Of course, given the outright move of 30 bps in both greens and blues in two days, it makes sense for these straddles to remain bid, especially as this week includes the FOMC meeting and China’s year end, with associated concerns about liquidity in general and a default in the Credit Equals Gold No 1 fund. (Almost sounds like a scheme that Seinfeld’s Kramer could have come up with: Kramerica’s fund of funds).


In spite of the bid at the money, a market maker friend of mine said the euro$ option pit in general does not want to own puts, citing as an example a local seller of 2EH 9837/9800 put spreads at 4.0 covered 64, which was worth 4.6 with the straddle set 29.5/30.0.  Similarly he cited 2EM (green June) 9775 puts which were being made 6.5/7.0 when he showed 7.5 as value.  As skew sellers hit the pit, locals adjust the downside lower accordingly, and appear to have excess inventory.  One other note was buying in EDH4 9962p late Friday for 0.75, as front contracts closed lower on the day, reflecting at least a modicum of concern that funding pressures could spill over.  EDH4 straddle settled 4.0.


VIX also exploded as stocks dumped.  VIX closed at 18, having been sub-12 earlier in the month.

Posted on January 25, 2014 at 5:20 pm by alexmanzara · Permalink
In: Eurodollar Options

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