Interest Rate Traders Take Advantage of Pullback In Futures and Volatility, Buying Cheap Upside Options

Futures lower across the board
Volatility lower, as well.
Floor volume outpaces screen
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: September 25, 2019

Futures were relatively quiet overnight, with tight 2-3 tick ranges. A better than expected a new home sales number edged us lower. But a vague Trump tweet about a China deal propped up equities and moved Eurodollars to their session lows where we finished the session.

Big Trades

EDH0 98.00/98.125 put spread vs 98.875/99.125 call spread, selling the put spread for 1.5, 25K

Nov (EDX9) 98.00/98.125 call spread 1x2 with the EDZ9 98.50 call, paying 1.25 on 35K (see note)

EDZ9 98.625 call, paying 1 on 40K

Oct (EDV9) 98.25/98.50 call spread, paying 0.5 on 25K (see note)

Oct (EDV9) 98.375/98.625 call spread, paying 0.75 on 25K

Nov (EDX9) 98.375/98.75 call spread, paying 1 on 40K (see note)


Things to Watch in Interest Rate Futures

#1 Well, there was definitely a theme today; buy cheap upside! Market players take advantage of the pullback in futures, and volatility, to scoop up some cheap upside plays. There were some which were adding to existing positions, some that simply adjusted strikes in legacy positions and new positions. Regardless, it’s not a bad strategy when the bulk of our move down was fueled by a vague Trump tweet saying a deal with China “could happen sooner than you think.” It seems almost inevitable that it will eventually be followed by a “we’re a long way off” tweet to send us back up. Such is the market these days…

#2 Remember this position from way back in August? Paper built a big position in the October (EDV9) expiration. They bought mostly the 98.25 and the 98.375 calls, while selling strikes behind them. This was when the EDZ9 was trading around 98.21. However, since then we have traded as high as 98.32 and retraced quite a bit. In addition, due to time decay and the fact that EDV9 is now the front option expiration (expire on 10/11/19), these calls have basically lost their optionality. So with just over 3 weeks to expiration, this player may be hoping for a black swan type of event. Or maybe they are just bitter and can’t admit they were wrong!

#3 Another interesting trade was in Nov (EDX9) call spreads. These look to be a new position. Now, I understand the allure of cheap calls in an environment like this, but barring a cut at the October meeting, it would seem that the 83 strike is a bit of a reach. Especially when you have certain banks calling for FRA-OIS to expand to around 50, which would only make it more difficult to reach those strikes. At 1 tick, it’s not a very expensive wager and it may simply be a cheap hedge against an unforeseen move. But as a spec trade, it wouldn’t be my first choice.

About the Author

Albert Marquez is a Chicago-based options and futures broker, specializing in interest rates. You can reach Albert on Twitter@STIR_Report or