Jan 9, 2018. The Mullet

–Interest rate trading was uneventful yesterday, with most settles within a basis point of Friday’s close.  Treasury premium selling was an early feature, for example TYH 122.5/124.5 strangle sold at 29, 5k (settled 28).  TYH 123.5^ was 1’11 bid early but settled 1’09.  USH 152 straddle settled 3’02, right at 7%.

–Atlanta Fed President (voter this year) gave a vanilla speech about the outlook.  Short on details, but a couple of things stood out: First, he cited a recovery in capital spending as a welcome development: “…equipment spending [is] on track to post double digit gains in the 3rd and 4th quarter.”  About a year ago, soft (and unexplained) weakness in capex was a constant topic, but it seems to have magically recovered.  In the same way, economists now bemoan low and unexplained weak inflation.

–The other thing that Bostic mentioned is that smaller firms seem to express more optimism than larger firms.  (This is pretty clear from NFIB surveys).  I would suspect skewed results…surveys of small businesses probably are answered by the top guys, who see results first hand.  In larger companies, surveys probably go to the information desk… “Just tell them it’s a little better than last year.  We don’t want to make any waves.”

–By the way, consumer credit, released yesterday afternoon, exploded $28b to an 8.8% annual pace.

–This next part is repetition of a note yesterday, with a bit more detail.  With little fanfare, the exchange opened a 5th midcurve quarterly for trading.  There was an immediate f-up.

–The 5th midcurve is on the 9th quarterly contract, currently EDH20, and the option expires in March of 2019, rather than in March 2018 (like the midcurve on the EDH19 contract).  The exchange, in its wisdom, has designated this as E0H19 to distinguish it from E0H18 which is the short (red) March symbol.  On screen, someone placed a 1 bid for eight thousand E0H19 9725/9700 put spread.  The E0H18 put spread of same strikes was 0.5 offer.  Apparently, market makers sold the 1’s, not realizing there was an additional YEAR of time value with a different underlying contract.  They complained to the exchange.

–Keep in mind at this point, that in days of old, you had to memorize about ten trading rules before you could sit in front of a panel who had to approve your membership to the exchange.  One of the rules (for open outcry): you cannot bid or offer outside the current bid/ask.  Another: you cannot do anything to intentionally confuse other members about the market.

–In any case, the sellers complained, as the ACTUAL market then posted of 5.0/6.0.  The exchange let the trade stand, but (arbitrarily?) changed the premium to 4 from 1.  It was NOT an active underlying market.  According to the volume sheets, 13670 of this put spread traded.  It settled at 5.25.

–The pit has nicknamed this midcurve ‘the MULLET’, (short in the front, long in the back).  This might be one of the guys that thought he was selling SHORT March.

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Posted on January 9, 2018 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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