March 15. Weekly interest rate option summary

-Interest rate futures option vol surges at the end of the week.

-Geopolitical tensions completely reverse move to higher yields associated with improved domestic employment picture.

Early in the week implied vol was sold, with TYM straddle trading as low as 4.5 as futures churned around the 123.5 strike.  As the week progressed and TY futures rallied well through highs just prior to the employment report, implied vol firmed, surging notably on Friday morning.  One week ago TYM 123.5^ at 2’07 was 4.7 vol, on Monday the 124^ traded 2’02 or 4.5, and on Friday the 124.5^ settled 2’10 or 5.0.

It was two Monday’s ago on March 3 that TYM reached its high of 125-07 as the Russia/Ukraine situation spurred an initial flight to quality bid.  Friday’s high was 125-00, but interestingly the 30 yr bond contract traded almost exactly at March 3 high, and back month blue and gold Eurodollars exceeded those highs, though fell back by the end of the day.  5/30 treasury spread ended the week at a new recent low just below 206.

Besides the most obvious tensions due to Russia, it’s worth noting that China appears to be slowing considerably, with Premier Li warning of further defaults and other challenges.  Copper continued its descent.  Brazil Bovespa closed the week on its low below 45000, essentially matching the low last summer associated with the tighten/taper swoon.  The US ten year yield ended the week at 2.65, down 15 bps.  Given the yield range of 2.50 to 3.00 for the past seven months or so, it would be reasonable to position short in treasuries as we approach the lower boundary.  I don’t think many people allow much of a chance for a hard break through the lower bound, but even if the Russian situation comes off the boil, problems in China and Japan (and EM) could still keep a solid underlying bid in treasuries; I wouldn’t be surprised by a move to 2.25 by the beginning of May, which would cause a considerable amount of pain.

Now for a couple of specific trades: TYM 119/121 put spread was bought heavily early in the week (50k) for 12/64, covered 123-20 to 21 with 10 delta.  Great trade; by the end of the week the put spread settled 8 with futures up a full point to 124-21.  These puts are among the largest in open interest, with 140k open in 121p and 119k in 119p.  Probably still worth buying put spreads delta neutral.  Early Friday morning there was a large buyer of TYJ 126 calls (short cover) to buy TYK 123/126 combo (new position).  I believe the combo traded 1 for put with futures ref 124-195.  In any case, on Thursday, TYK 123p settled 16 and 126c 18 vs 124-20 (strangle at 34).  On Friday the 123p settled 18 and the call 22 with futures only up 1 at 124-21.  Gives an idea of change in skew and vol…strangle was +6/64’s to 40.  Fear of the upside.  As I noted last week, after the employment report there was put selling and call spread buying, and vol was mired at the low, indicating little fear of the downside.

In Eurodollars vol surged as well.  For example, on Thursday blue April (3EJ) 9750^ settled 22.5 and 9762^ 23.0 vs 9754.  Straddle strip settled 45.5.  On Friday there was a buyer of the strip at 48, followed by the best offer being only 49.5, though it ended 48/49.  3EJ 9750^ settled 24.

There has been continuous buying of Short June (0EM) 9937 puts outright, and Green June 9850 puts, the latter mostly as part of 9850/9825/9800 put flies, which have traded 4.0 to 4.5 in price.  Short June 9937^ was unchanged on the week at 19.5.  Green June 9850 straddle settled 37.0.

It was a month ago on Feb 18 that 2EM 9825/9875 strangles were sold in size of about 40k from 20.5 to 19.5, followed by additional sales of similar quantity in 9837/9887 strangles.  At the time 2EM 9850 straddle was around 41.  On Friday, 2EM 9825/9875 strangle settled 16.5 ref 9852.5.

Over the past week, green/blue pack spread has flattened by about 5 bps.  Green/blue atm straddle spreads remain pretty tight at around 4 bps.  For example, 2EM 9850^ 37.0s vs 3EM 9750^ 41.5s.  Due to flattening bias and the pit being positioned with heavy long inventory in green calls, I favor buying blue calls vs greens.

Posted on March 15, 2014 at 12:15 pm by alexmanzara · Permalink
In: Eurodollar Options

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