Sept 14. Insurance

–Hurricane Florence is making landfall in the Carolinas.  Time for insurance.  Well, probably should have had insurance in place already.

–The interest rate options market is the polar opposite.  Not a ripple on the horizon.  As the chart below shows, long maturity treasury implied vol is making all time lows (or close enough).  The five year?  That’s holding above the lows made in 2012 and 2013, prior to the ‘temper tantrum’.  So let’s take a closer look at that time.  In May of 2013 the onset of the taper tantrum roiled the markets.  The ten year yield exploded from around 1.75% to nearly 3% in September, then pulled back, finally closing out the year with a re-test of 3%.  Implied vol on the treasury future in December of 2013 ranged from about 5.8% to 5.2%.   It wasn’t a crazy panic bid for premium, although in the late summer and fall vols were higher.  To give an example, TYZ 119.5^ settled yesterday 1’25.  If vols were back at Dec 2013 levels, that straddle would be a full point higher at 2’25.

–So the five year treasury yield is the highest it’s been since 2009.  The inflation indexed 5y yield is at a new high of 88.8 bps.  And there is no reach whatsoever for premium.  Who needs insurance?  Inflation isn’t accelerating and the Central Banks have us covered.  It’s not like we have a nut like Erdogan running things which necessitated a 6.25% rate hike…

–Of course, there wasn’t an actual hike by the Fed in 2013, and at the end of the year, the first green euro$ (9th quarterly) was around 98.50 or 1.5%.  Yesterday EDU0 settled 96.91.  I suppose it makes sense, as the curve has flattened. Since late 2015 there have been seven hikes, and the 9th euro$ contract is around 160 bps above where it was in late 2013.  Maybe there’s a few more hikes to reach neutral, but there’s no use in buying puts (?)

–A story yesterday in the FT says ‘Trader blows €100m hole in Nasdaq Power Market’. “The catalyst for the trading loss was a series of backfiring bets on the price difference between German and Nordic power markets, according to multiple sources in the industry. Mr Aas’s trades were positioned for the gap between the two to narrow, but instead it widened sharply to a level 17 times larger than normal.”  As is often tossed around in this business “That’s a (insert your number here) standard deviation move.  That should only happen once in 150 years.”  Right.  When they were using coal and wood.  Sometimes the stuff just gets away from you.

–Another 50k 0EH 9687/9662/9637p fly 1x3x2 were blocked, paying 2.0 and 2.5 but both covered 7 delta vs 9688.5 (so slightly better).  Settled 2.25 vs 9689.  Randolph Duke:  ‘You see Mortimer?  William has ALREADY made us money.’ Billy Ray Valentine, “You want me to break something else?”

Five, ten and thrity year treasury vol

Posted on September 14, 2018 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

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