Volatility Made a Brief Appearance in the STIRs Market

May 12, 2020 05:16 PM
Volatility lower after brief move higher
Futures mixed with front end lower
Eurodollar futures in relatively tight range, with most contracts trading in 4 tick ranges
Interest Rates Report

Interest Rates Report

Volatility edged up slightly yesterday then turned lower today after a big straddle seller dragged the rest of the curve lower. Attention continues to be on the 100.00 strike and higher as negative interest rate policy (NIRP) questions loom large.

Big Trades


EDZ0 99.25/99.50/99.75 call fly, selling 80K at 7 vs 99.71-99.72 (see note)


EDZ0 99.25/99.50/99.75 call fly, selling 23K at 7 vs 99.70

EDM1 100.375 calls, paying 3.5 on 10K

EDM1 100.25 calls, paying 4.5 vs 99.79 on 20K (see note)

EDM0 99.625 straddle, selling 33K from 9-8 (see note)

Quick Takes

1. What a difference a month and a half makes. The EDZ0 was a liquidation. These were bought in late March, paying 6 on over 100K (futures reference level 99.655). At the time these were put on, there were a lot of strategies targeting the 99.50 strike in many expirations. And why not? Libor was elevated, FRA/OIS was volatile and at high levels. So someone made a guess that they would relax somewhat by year end, but still keep us near the 99.50 strike. Some players just love pinning strikes. Now, both have relaxed and the market is now looking to force the NIRP narrative upon the Fed. Take your meager profit and look for the next play.

2. Over the last week we’ve seen an increase in activity above the 100.00 strike. There has been plenty of speculation about NIRP, but little action up until last week. In fact, since last week the open interest in the 100.00 to the 100.50 strikes from EDM0 through EDM1 has increased over 187K. And that doesn’t include today’s trades, which most likely will take that total over 200K. We’ve seen trades in the 100.00 strike and higher in the past, but typically they were sold in a package to finance the purchase of lower strikes. Not the case here. We are now seeing short covers of the 99.875 and 100.00 calls and new longs being established. In addition, almost 100K of that new open interest is in the EDH1 and EDM1 contracts. That’s a long way out and that view doesn’t bode well for the economic wellbeing of our country.

3. Big volatility crusher in EDM0 towards the end of the day. You can see the effects on overall volatility.

It looks like the seller took advantage of yesterday’s rare uptick in volatility to get cleaned up on some fast approaching expiration positions. That’s definitely one of the bigger straddle trades we’ve seen since the trading floor closed.


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 stirreport@gmail.com.