Negative?

April 30, 2020

–Yesterday stocks powered to new recent highs with SPX around the 0.618 retracement and up 2.7% on the day as Gilead’s test results again show promise. (ESM0 2941.00). However, the sharp-eyed casual observer might have noticed a few inconsistencies.  For example, Q1 GDP was -4.8%.  Apparently Reuters had originally released it as +4.8%, and the guest on Maria Bartiromo’s show ran with it, gushing about the surprising strength in the economy for about 2 minutes before realizing it was a negative number.  Didn’t say, “this must be a mistake”, just accepted the incorrect report on its face.  On the other hand, if I said that Hertz and Chesapeake are about to declare bankruptcy, which they are, you might hesitate to grasp that stocks soared yesterday.  As friend Brent C mentioned, red eurodollars have never been above the 9975 strike (1/4 of one percent) but yesterday EDH21 and EDM21 settled 9975 and EDU21 at 74.5.  Sign of a V-shaped recovery?  Um, NO.  In yesterday’s note I mentioned the Short red May midcurve 9975 straddle which settled 4.5.  Perhaps that focused someone on risk versus level, because there was a short covering buyer of about 40k of the 0EK 9975c for 3.0 (OI fell 30k) and the straddle settled 6.0 vs 9975 with two weeks to go.

–What IS supportive of financial assets is the drop in 3m libor which set yesterday at 68.6 bps.  In March it reached a high of 145 bps as credit concerns washed over the market.  But going into the FOMC meeting, the comfort of all the Fed’s extraordinary palliative actions has numbed the risk and pressed libor down.  The Fed avoided raising IOER, which caused FFK0 to be the star performer on the day, rising 3.25 bps to 99.9575 or 4.25 bps.  The Fed effective rate has been setting at 4 bps.  I suppose EFFR is on its way to zero.  Shrug.  Now we’re in the negative yield discussion.  It’s like one of my bad long option positions.  It can only GO TO ZERO, right?  I’ll just pull the ostrich routine and bury my head in the sand.  Continuing along the same thread of negativity, a friend sent a copy of an S&P ‘Consultation’ asking for input on index pricing with respect to negative commodity prices.  It’s getting a little out of hand.  Do we simply accept these concepts?  When I was a kid, my mother would send me and my big brother out on Christmas eve with 2 dollars to buy a Christmas tree.  Because THAT’S when we could afford to buy a tree.  So we walked a few blocks in the cold to a barren lot and my brother offered the guy 1 dollar for a tree.  I was probably 6 and my brother was 9 or 10.  And the guy said he was going to get the chainsaw out and destroy that tree before giving it to us for a dollar.  That stuck with me.  I think he might have relented and sold us the tree.  But when you have unwanted inventory you hold it, or destroy it, or let it rot.  If we told the guy to PAY us to take the tree away he might have used the chainsaw on us.  Anyway, I don’t think negative prices for financial assets should be allowed.      

–Ten year yield rose 1.4 bps yesterday to 62.2.  Two year yield fell by a similar amount to 19.5; a small steepener.   In dollars, near contracts outperformed as well.  New high in EDM0/EDM1 one-year calendar to -8 bps.  That is the most inverted one-yr calendar on the curve.  Sept/Sept is -3, Dec/Dec -3.5 and from there, all positive.  Jobless Claims today.     

Posted on April 30, 2020 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

SELL PREMIUM! ENHANCE INCOME

April 29, 2020

–Q1 GDP expected -4 to -5%.  FOMC announcement and press conference today.  Some expect a tweak higher in IOER as the Fed Eff is now setting at just 4 bps, but I would suspect they leave unch’d.  After a year or more of the market thinking that pegging terminal libor was easy and being consistently wrong, once again eurodollar strip pricing says that 3 month libor will be 25 to 35 bps for the next two years.  Every eurodollar contract from EDM’20 to EDM’22 is between 99.64 and 99.73.  And that my friends, is what is known as “forward guidance”. As noted, straddles have been pounded.  For example, EDM1 9975 straddle is 19.5 bps.  With over 2 weeks to go, the midcurve red May 9975 straddle settled at just 4.5 bps vs EDM21 9973.0.  Seems incredibly cheap in front of FOMC, etc.  Until you look at a chart and realize that since April 20 the range in the contract has been 9971 to 9974…oh, and we squeezed a break-out new high this morning at 9974.5.  Might as well jump on the bandwagon: FREE MONEY.  SELL THE SHORT MAY STRADDLE AT 4!  (for the compliance people, that’s a joke, not a recommendation). 

–Reuters reports that Boeing is readying a huge multi-billion bond sale to the Federal Reserve, oops, I mean to the MARKET.  There’s a lot of bonds out there.  But Powell will likely assure us this afternoon they can be easily absorbed.  

–Ten year yield fell 4.6 bps yesterday to 60.8.  Exit sales yesterday of 40k EDM0 9937.5 put at 1.0.  EDM0 9962.5 straddle settled 11.0.  The 9962/9950/9937 put fly settled 1.75.   

Posted on April 29, 2020 at 6:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Of euro$ vol and oil calendars

April 28, 2020

–On April 24, 2015, the Fed Effective was 13 bps with a 0-25 target, just like now.  The Fed had not yet begun to raise rates.  EDM15 was 9969.5, EDU15 9957.5, not all that far from yesterday’s M20 at 9960.5 U20 9967.5.  With essentially the same amount of time until expiration, the June straddle was 6.5 vs yesterday’s 11.5 and Sept was 14.5 vs yesterday’s 15.5.   From there, the story deviates quite a bit.  In the past couple of days, eurodollar premium has been crushed.  Let’s go back to 2015 for a second.  The first red was EDM16 at 9907.0 and the first green was EDM17 at 9842.0.  The curve was MUCH steeper as the market expected eventual tightening.  Yesterday, the first red is EDM21 which settled 9972 and the EDM22 contract settled 9965.0.  FLAT.  In 2015, the red June 9912^ was 49.5 and the long green 9837.5^ was 98.5.  Yesterday, EDM21 9975^ was hammered down to 19.5 from 23 on Friday and EDM22 9962.5^ to 40.5 from 44.0 on Friday.  It’s true that back month yield levels are much lower so straddles SHOULD also be lower.  But 19.5 in red June vs 49.5?  The BOJ said they would keep the 10y  JGB around 0 and there’s chatter of the Fed engaging in YCC (yield curve control).  But these straddle levels suggest the eurodollar market is wearing cement shoes at the bottom of the Chicago River.  DEAD.  Going the way of Japan. No hope.  Disclaimer: I did not go back to look for the time when the first red straddle was the cheapest ever.  I just looked at a couple of examples.  In the middle of 2017 we had straddle levels a bit more consistent with today’s.  For example, the first red with 418 days to go was the 9837.5 strike at just 32 bps. (there are 413 dte now).  My only point is that these levels suggest a black hole.

–Articles abound this morning about oil.  Earlier this morning a snapshot on CME site had CLM0 11.46, -132 and CLZ0 28.02 +56.  That’s a spread of 16.46.  Actual spread as of this writing is -16.25/-16.22 with CLZ0 +80 cents at 28.26 with volume of over 22k.  It’s not a fake price.  So near oil reflects the same thing as near eurodollars.  Cement.  But back oil is telegraphing a somewhat different outcome than back dollars. 

–How about the yield curve?  Not that it matters much any more but it did steepen slightly with 2’s up 1.2 bps, tens +6.3 to 65.4 and thirties +8.0 to 125.1.  Implied vol in treasuries, like dollars, also slumped.  TYM0 138.5 straddle settled 1’22 or 4.6.   7 year auction today.

–The Fed yesterday announced it is making credit available to smaller municipalities.  In related news, Illinois State Representative Darren Bailey of Xenia (population 364) won a restraining order against Gov Pritzker’s stay at home dictum.  I hope Xenia gets a bit of Fed funding.  But they probably aren’t asking for it.  And my guess is they’ll be fine either way.

Posted on April 28, 2020 at 5:34 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Crude lower, stocks higher

April 27, 2020

–Little change in rates on Friday, although the bias was for a flatter curve.  5/30 closed at a new recent low of 81 bps in front of today’s 2 and 5 year auctions.  7s are issued tomorrow.  The ten year yield ended at 59.1 bps, down 2.2 on the day.  Front end of the dollar curve was the star performer, with EDK0 up 7.75 to 9947.5 and EDM0 up 4.5 to 9960.0 as 3m libor fell to 88 bps.  The May contract at 52.5 bps suggests that libor will come down more rapidly that previously thought.  This morning EDM0 is up another 2 bps at 9962.0, just 38 bps.  The high tick for the contract was on March 16 at 9976.5, but this has pretty much been the high since the subsequent pull-back.  Interestingly, bitcoin made its low around 4500 in the middle of March, but is now at a new recent high 7780.  ESM also near recent highs printing 2860, +30.5 on the day.  The Bank of Japan said it would engage in unlimited QE and keep the ten year yield around 0.  India’s central bank is calling for increased fiscal support.  In a word, more, all to the benefit of equities.  

–Implied vol in dollars was crushed on Friday, with 5.5-6.5 bps being lopped off long green straddles.  EDM22 9962.5 straddle settled 49.5 on Thursday, and on Friday 44.0, and that’s with futures unch’d at 9967.5.  TY vol is back around 5%, the last couple of times it dipped to this level it was a buy.  

–June WTI crude prints sub $15/bbl this morning at 14.55, down 2.39.  The May expiration with negative prices has made participants in that particular market keenly aware of downside risks, as opposed to some other financial assets that have been ‘saved’ by the authorities.  I don’t know if the grand re-opening will instantly serve to work off inventories, but I think it will go a long way.  As soon as it gets slightly warmer in Chicago, the ‘stay indoors’ orders are going to be completely ignored.  Here’s a clip of a protest in Sacramento, CA from a few days ago. 

Posted on April 27, 2020 at 5:44 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Good news/ bad news

April 26, 2020 – Weekly comment

Below is a chart that makes us feel a little bit better about a return to normalcy.  The white line is VIX.  In March it topped above 80 but on Friday it ended at a new recent low, just a shade under 36.  By no means is it close to where it was through the latter part of 2019 when It averaged around 14, but the last month’s trend is encouraging.  The amber line is 10y treasury vol.  Topped above 13 in March, but is now back to around 5, and below the level of last September during the repo ‘scare’.  Of particular interest is the green line, 3 month libor, which plunged in early March, only to explode higher after the March 15 emergency cut to zero served to jolt the realization that credit flows could be severely impaired.  Three month libor topped in late March at 1.45% but has eased since then due to heroic measures by the Fed, and is now down to just under 89 bps with the June EDM0 eurodollar contract displaying further confidence, having settled 99.60 on Friday. The only higher settlement in EDM0 was on March 16 at 9961.5.

In a way, these measures are an indication of easing financial stress.  The stock market has taken note of the same policy measures and has posted a strong rally off the March 23 low. 

However, many aspects of the current situation remain critical.  While SPX has rallied 26% from the March 23 low, the KBE bank index is up only 21% (still down 39% from early Feb high) and XLF is up about 23%.  The dollar index is below the late March highs, but what is troubling is the reaction of emerging market currencies which are under severe pressure without the means to raise dollars through trade in order to service dollar denominated debt.  Commodity prices are generally in the dirt, and global transport has waned.

Future ability to service/roll debt, even at low rates, is going to be the key issue going forward.  Given that global debt levels were at record highs, and US corporate debt was at a record high relative to GDP, it seems quite unlikely that there won’t be a much larger shake-out as the Fed gradually pulls back support.  John Mauldin put it this way: “Essentially, many of the loans the Fed was trying to help are going to be downgraded anyway [include munis, MBS].  The Fed’s actions simply kept the price up, but did not increase the companies’ ability to actually service their debt.  So, many of the zombie companies will fail anyway.”  But it won’t just be “zombies”.  Many firms are going to see forward revenues decline significantly whether due to decreased global trade or semi-permanent changes in consumer behavior.

Eurodollar futures and options are telegraphing an outcome that seems somewhat inconsistent with the stock rally.  For example, the curve was steepening as the Fed was expected to ease and then actually cut aggressively.  The red/green eurodollar pack spread closed around 25 bps on March 18, and red/gold closed just under 62.  On Friday the levels were 9.125 and 38.625.  The red pack is the average price of the four quarterly contracts one year forward (year 2, or EDM1, EDU1, EDZ1, EDH2) the greens are year 3 and the golds are year 5.   I am rounding here, but the reds settled Friday at an average 99.7175 or just over 28 bps, greens at 37 bps, blues (year 4) at 51 bps and golds at 67.  The same story of course, is captured in the 5y treasury yield at 36 bps, but the point is that near term flattening is indicating general economic malaise over the next few years.  A steeper curve which generates positive carry goes a long way in producing income to offset bad loan losses.

Let’s take a look at week to week changes in some straddle levels on the dollar curve. 

APRIL 17APRIL 24^ CHG
FUTURE PRATM ^FUTURE PRATM ^
EDU099.6550.20099.6700.165-0.035
EDU199.7200.32099.7250.270-0.050
EDU299.6150.63099.6500.505-0.125
0EU099.7200.19599.7250.155-0.040
2EU099.6150.28099.6500.240-0.040
3EU099.4600.36099.5100.320-0.040

Without much of a week to week change in futures, straddles were crushed, with midcurves losing 4 bps.  Especially stark is the change in long-dated straddles, where the long dated EDU22 (876 days until expiry) dropped 12.5 bps on the week with 5.5 of that occurring Thursday to Friday.  The green pack 9962.5 straddle strip imploded from 266 bps on April 17, to 213 on April 24!

What’s the signal?  It’s like the COVID patient being put on a ventilator.  About one-in-five chance of continued viability.  The Fed has employed the ventilator for many types of debt.  A mechanical means of breathing.

I’ve been in favor of a steeper curve for some time.  I think that a precautionary move to build inventory cushions, a trend to bring basic manufacturing back to the US, increased safety costs, and a failure of weaker players to survive, will lead to inevitable price pressures against a background of staggering government debt and deficits.  That might be correct.  Eventually. It’s not what the market was saying this week.    

The coming week should be eventful.  178 companies of the S&P are slated to release earnings.  The FOMC meeting and press conference are Wednesday.  ECB and BOJ also meet.  Treasury issues 2 and 5 year notes on Monday, with 7s on Tuesday.  We know that treasury coupons aren’t providing much in the way of income.  This week we see which companies can maintain dividends.    

4/17/20204/17/2020chg
UST 2Y20.421.20.8
UST 5Y36.436.1-0.3
UST 10Y65.459.1-6.3
UST 30Y127.4117.1-10.3
GERM 2Y-67.9-70.6-2.7
GERM 10Y-47.2-47.3-0.1
JPN 30Y49.643.4-6.2
EURO$ M0/M1-17.5-13.04.5
EURO$ M1/M28.05.5-2.5
EUR108.75108.21-0.54
CRUDE (1st cont)25.0316.94-8.09
SPX2874.562836.74-37.82-1.3%
VIX38.1535.93-2.22
Posted on April 26, 2020 at 10:08 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Glitch in the system

April 24, 2020

–Front June WTI rebounded 2.72 by settlement to close 16.50.  Jan’21 contract settled 29.36 which was down 0.41.  With regard to CLK expiration debacle, a friend mentioned to me that retail longs on one of the popular internet broker platforms were not able to exit because the system would not allow order entry of a negative price.  (Call the “help” desk.  Put on hold with elevator music.  Throw phone at wall. “Sir are you there?  It seems to be a problem with YOUR device.”)  

–Rates were quiet with yields mostly down around 1 bp.  Tens at 61.3 bps, -0.4.  The three-month libor setting finally dropped below 1% yesterday at 0.99138.  As a reminder, that’s above every rate on the eurodollar curve until the Dec’2026 contract which settled 98.98.  It’s above everything on the treasury curve except the long bond which I marked at 1.203%.  Still, the steady drop in libor is supporting the front end of the curve where EDM0 closed +1.5 at 99.555 or 44.5 bps.  New recent highs in EDM0/EDU0 calendar at -9.5 and in EDU0/EDZ0 at +1.5.  

–There was a large buyer of EDM0 9912/9900p 2×1 at prices of 1.25 and 0.5, two of the higher strike.  Exit trade, open interest dropped nearly 100k in the 9912p.  Vol generally continues to slip.  May treasury options expire today.  At yesterday’s close TYK0 139 straddle settled 21 vs 139-005. June settled 1’41.  Not looking for much activity today, though Durables and Capital Goods Orders are coming out with expectations of large declines from 7 to 14 pct.  Perhaps of more interest will be Michigan inflation expectations.  The 1 year was 2.1% last and 5 year 2.5%. 

–Stocks slipped yesterday on news that Gilead’s drug may not be the magic bullet.  Chopping around now and slightly positive as of this writing.

Posted on April 24, 2020 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Rant part 2

April 23, 2020

THESE THOUGHTS ARE MY OWN AND HAVE NOTHING TO DO WITH ANYONE ELSE. I AM RESPONSIBLE FOR CONTENT. AS ALWAYS, I MIGHT BE WRONG.

–Terry Duffy, CEO of CME Group appeared on CNBC to give a defense of the May WTI expiration with negative prices.  Forgive the Seinfeld references, but it’s like Elaine dancing.  You can’t un-see it.  Here’s a link.
https://www.cnbc.com/2020/04/22/cme-boss-says-his-exchange-is-not-for-retail-investors-and-its-no-secret-futures-can-go-negative.html

–The arguments Duffy put forth simply fall under their own weight.  Where to start?  Duffy’s two main points seem to be, 1) that the exchange doesn’t have any responsibility because we talked to regulators and 2) if the price wasn’t correct, then someone could have taken the other side.  So let’s take the second one first.  “Why didn’t someone just stand in there and take the other side?”  That explanation would allow spoofing as well.  Someone trying to muscle the markets with phantom bids and large buys of small offers which immediately cancel?  If there’s a big bid and you think it’s phantom, just sell it.  And then sell a couple more at the next price lower.  Someone tries to bang the close?  Just take the other side.  The exchange has a responsibility to maintain orderly markets with integrity for price discovery.  Otherwise, why would the exchange EVER get involved during an upside squeeze because the amount of open interest in futures dwarfs the physical supply?   FAIL.  He also tries to foist off responsibility on the regulators (and I am sure they bear responsibility as well).  He mentions a previous CNBC segment with the head of the CFTC and then says the exchange is “a neutral facilitator of risk management.”  Jackie Chiles could have made that one up.  I am shocked and chagrined. Neutral.  Innocent bystander.  THAT’S WHY THERE ARE RULES.  Look, the worst thing you can do in this business is not own up to a bad trade.  But Duffy takes it farther.  Much farther.  “We worked with gov’t regulators two weeks prior [with emphasis] before making our announcement of allowing negative prices.  This was no secret that this was coming at us.”  Wait a second, it was OBVIOUS that there was a large chunk of open interest going into expiration and that the market would not be in balance due to storage issues.  You knew it weeks before.  Yet the CME and CFTC did nothing to order participants to pare back positions to allow a smooth expiration.  EPIC FAIL.  Oh, but wait a second, “we’re in constant contact with USO and that’s why they were out of the May contract.” [jaw hits ground]  Duffy also tries to deflect the main topic by talking about Trump’s proposal to top off the SPR.  The issue is that there was a clear imbalance going into expiration and the exchange did nothing to ensure orderly markets.  Here’s another dilly: “the small retail investors are someone we do not target.” I guess the exchange came up with minis and micros to target Bill Gates.

–This is not simply about negative prices.  Futures contracts reflect carrying costs, including storage, insurance, interest rates.  If those carrying costs outweigh the value of the product, then I guess a negative futures price makes sense.  And that’s why farmers occasionally burn their crops.  That is not the main issue here.  It’s that there was a clear imbalance going into expiration and the exchange stood aside and watched from the sidelines.  The futures market “worked to perfection”.  I CALL BULLSHIT.

Posted on April 23, 2020 at 7:08 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Rate market quiet; vol slips

April 23, 2020

–Quiet day Wednesday with rate futures erasing some of Tuesday’s moves.  Yields rose, with tens +4.6 to 61.7 bps.  Curve steepened with 2/10 +4.2 to 40.8.  In eurodollars, reds -0.75, greens -2.5, blues -3.75 and golds -4.125, so the curve edged steeper there as well.  EDM0 settled 9954, up 2.5 on the day, as three month libor presses lower (1.02 yesterday).  EDM0 9950 straddle settled 18.0 as all quarterly euro$ straddles saw losses of 1-2.5 bps.  For example, the red Sept (EDU21) 9975^ settled 30 from 32.  Still leaves upside breakeven above 100 at negative rates, which shouldn’t be too surprising given the news feeds.   Yesterday Mitch McConnell said states should be allowed to declare bankruptcy, in part to escape crushing pension liability; this after Illinois beseeched the Federal government for COVID help over and above medical costs in order to help with pensions and other expenses (like its backlog of $8 billion in unpaid bills before the crisis ever hit).  The ECB said it would accept fallen angels as collateral for loans.  Jobless claims are expected around 4 million, with the cumulative total over the past month wiping out all employment gains since the recovery (Reuters).  

–One trade I found somewhat interesting is a buyer of ~10k TUM0 110.5c for just under 1.5 (paid 1.5 covered 110-08), futures settle 110-061.  While the cash 2y note is around 20 bps, I calculate this strike to be around 6 bps and there are just 30 calendar days until expiration.  Not a particularly large trade, but it simply points up demand for crash protection even as rate futures have settled into fairly tight ranges.  

–WTI continues to rebound this morning with CLM0 currently up nearly $2/bbl at 15.76.  On the topic of oil, CME CEO Terry Duffy gave a defense of negative pricing on CNBC yesterday.  Lame.  I am adding another note to discuss in further detail this morning. 

Posted on April 23, 2020 at 5:09 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

27 bp euro$, $27 oil

April 22, 2020

–And now, back to our regularly scheduled programming…

–Tens slipped another 5.2 bps yesterday to 57.1 bps while twos edged slightly higher to 20.5.  The curve flattened, with 2/10 at 36.6 and 5/30 at a new recent low 82.6 bps.  Bank stocks continue to lock shaky; the income generated from a positive curve can go a long way in absorbing lending losses, but the combination of oil imploding and the curve flattening is a gale force headwind.  It seems more and more obvious that the US and rest of world needs a much much weaker USD (and it certainly seems that gov’ts worldwide are trying the best they can to destroy the value of money).  Maybe that feeds into the reason that gold is up >$30/oz this morning.  GCM0 now 1721.00; I would expect a price over 1900 in the next couple of months.  

–June WTI (CLM0) is around $11/bbl this morning, while contracts in Q4 are averaging about $27.  I think the world can function with oil $25/35, but with governments intent on saving every business including shale, there seems to be little incentive to stop production.  Eventually the inventories will come back into balance. We probably need a big Barron’s headline like WHERE SHOULD WE STORE OIL? to make sure everyone is good and short.

–In dollars, reds/greens made a new low just under 9 bps.  The second red (EDU1) is now the high price on the curve at 99.73 or 27 bps.  It’s like the 27 club in a different context, $27/bbl oil, 27 bps rates.  Jimi, Janis, Kurt.  They tried to put the economy in rehab, the Fed said no, no, no.  At the front end of the curve, EDM0 is holding above 9950 (9951.5 settle) as libor setting grudgingly grinds lower (110 bps yesterday).  EDU0/EDU1 is -9.5 bps while EDU1/EDU2 is +7.0.  Again, the compression in the back end of the curve at these yield levels is a worrying sign.  

–May treasury options expire Friday.  With three full sessions left TYK 139.25 straddle is 37/38 vs 139-07.  Probably priced about right, as the average daily range in tens have been just under 21/32’s this month or 44/64s.  For those that think stocks could fall out of bed, TYK 140c are 4/5, but the high so far this month has been 139-22. 

Posted on April 22, 2020 at 6:08 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Rant

April 21, 2020

–What follows here is my own opinion.  Nothing to do with my employer or anyone else.  

–When globex (screen trading) was in its infancy, I was hanging around the floor late one day working at Refco, and by late I mean around 2:30, because eurodollars closed at 2:00pm, I saw that someone was offering the first serial eurodollar on the screen at a price of something like down 10.  I believe it was a May contract, and the June was only down 2.  Usually there’s a reason for something like that, but, it hadn’t been a particularly big day, so I bought a ten lot (maybe 50 were offered).  I hung around for about 15 minutes.  Someone else bought the others but there was no better bid in May, so I sold 10 June, thinking I had an edge of probably something like 5 bps at worst.  The next morning I came in and I check my statement.  No May.  I called up Refco balancing.  The CME busted the May trade.  “What?!”  Because they said it was “out of line with the market”.  I immediately called the CME.  “Look, that trade was out of line.  We tried to call you last night and couldn’t reach you.  We busted it.”  Me: “How do YOU know it was out of line?”  Because it was down 10.  More arguing.  I’m left short ten June which I cover for a loss of about 3 bps.  And in a bad mood.

–Another time I am on the floor, same desk, checking a call 1×3.  I check the quote (this was all through hand signals on a loud and crowded floor) at least three times.  I buy the 3 legs 100x for a client.  The clerk signals me a fill.  Next thing I know I have ZAL (the filling broker) and KAL (the local) at my desk, with KAL apoplectic saying I have to let him out because he thought it was a 1×2.  I said no way, your problem is with ZAL, not me.  I checked it 5 times.  Oh, and there was an exchange employee crowded in behind them in the aisle.  KAL screamed, you KNEW that price couldn’t be for the 1×3.  And I said I DIDN’T know that, and get the f out of my face.  And the exchange guy pipes in with this nugget, “You couldn’t buy a Mercedes for the price of a Cadillac, right?”  The f-yous were already going around, but it was at that point I almost threw out a punch which would have sent that smug asshole who didn’t even know what a 1×3 WAS, tumbling down the stairs. (It wasn’t BIGS btw).  That trade too, was busted.  

–Which brings me to May oil.  When the exchange was still owned by the members, I was at a meeting where Jack Sander, the fiery chairman, was shouting (as he always did), “We’re not in the TRADING business!  We’re in the RISK MANAGEMENT business.”  Integrity.  Price discovery.  Orderly markets.  All out the window yesterday with May WTI trading down to NEGATIVE $40/bbl.  Anytime there has been a potential squeeze in a market, the exchange steps in and says participants MUST reduce positions to maintain an orderly market.  I’ve seen it happen many times, in grains (Feruzzi in soybeans), and even in rates with a squeeze on the CTD relative to open interest in treasury futures. 

–Any idiot knows that there is NO WHERE to store oil, and that facilities in Cushing and everywhere else are sated.  That’s why May oil was trading at a 5 or 6 dollar discount to June.  That’s why there are thousands of tankers loaded with oil floating on the high seas.  “Why, these prices look odd.  You can buy the May contract, store it for a month, sell June forward, and pick up 25% in a month.”  No.  You can’t.  If there is one thing I have learned, if prices look like they are way out of line, and they are SITTING there for days, I don’t care what the market is, or how much I might think I know, there’s a VERY GOOD reason that prices are where they are.  The exchange obviously knew there is no storage available, and hasn’t been for weeks.  So they cavalierly send out a note yesterday, “Oh, by the way, all these energy prices can trade negative.”  I asked people if that was the first they heard of it and most said yes.  One person told me the exchange had discussed it in early April.  It was definitely the first I had heard, ONE DAY before today’s expiry.  So May WTI plunges over $50 barrel to negative 40.  Open interest coming into yesterday was about 108k contracts.  A drop of $50 on 100k contracts is $5 billion.  Every clearing firm with anyone long May oil was obviously clearing positions.  At any price.  That dentist in Omaha who figured he’d dabble in futures since his practice is iced, is now going to be recommending crowns for each and every patient with a tooth ache, as his five contracts just cost him a quarter of a million dollars on Monday afternoon.  What should the exchange have done?  Said there is a CLEAR IMBALANCE due to reduced storage and transportation, ALL PARTICIPANTS must reduce positions or prove capability to take or make delivery.  NO NEGATIVE PRICES.  The market would have cleared at positive numbers, because the exchange has the power to force liquidations.  Shorts may have bid ten cents, but prices would not have gone negative, but for the exchange giving the green light to cause a massive price dislocation at the last minute.  There is no economic benefit to be derived by negative prices.   That’s in rates.  That’s in oil.  I don’t know what business the exchange is in, but it’s not in risk management any more. 

Posted on April 21, 2020 at 5:38 am by alexmanzara · Permalink · 4 Comments
In: Eurodollar Options