Dec 1. Large euro$ trades
–Bearish factors sent yields close to new highs yesterday, with tens up 6 bps to 236.5. An OPEC deal caused oil to explode higher by nearly 10% from Tuesdays’s close, a rally of over $4, and this morning CLF is nearing $50. ADP was much stronger than expected at 216k. The new Treasury Sec’y suggested the US issue 100 year bonds (‘you want duration?’). Another minor factor might be the idea of $100 billion student loan forgiveness that Obama floated.
–Two large trades of note yesterday. First, in size of 55k, a buyer of curve. SOLD 0EG 9837/9812 put spread vs BOT 3EG 9762/9737 put spread for 2.5 debit. Underlying contracts are EDH8 at 9851.5 and EDH0 at 9779, so 14 out of the money on top strike on the first ps, and 16.5 out on the latter. The 9837 strike has been a popular target in reds; on Tuesday there was outright selling of 0EF 9837p in good size…the general idea is, given the Fed’s insistence on the idea of gradual hikes, the downside is limited in reds. On the other hand, as I’ve mentioned before, post-taper tantrum reds/golds hit 300 bps, and that spread is now 91. Reds/blues (which is what this option spread is) is only 69 bps as a pack spread. On a continued sell off, the idea is that the 0EG put spread will finish worthless or perhaps slightly in the money, with the blue put spread filling out.
–The second large trade was a block seller of 80k EDU7/EDZ7/EDH8/EDU8 double butterfly at 6.5. This settled at 7.0 as U7/Z7/H8 settled +4.5 and Z7/H8/M8 settled -2.5. The structure of the trade works out at -1/+3/-3/+1, so the core of the trade is long EDZ7 and short EDH8; that spread settled 9.0. On the attached chart, you can see that historically, this is a high price for the 4th/5th/6th/7th double, which is another way of saying that EDZ7 is ‘cheap’ on the curve. The gap moves on the chart indicate rolls of contracts…December contracts historically trade with a bit of “turn of the year’ premium. Why might EDZ7 trade a bit cheap currently? For a variety of reasons, including 1) it’s the first red which means there are short dated options with large positions, 2) Dec 29 in 2017 is Friday so there’s a 4 day turn, 3) there are some strategies related to the Fed’s ‘dot plot’ that focus primarily on December contracts. Related to the turn, recall that ever since Y2K when the Fed promised end of year liquidity, there hasn’t been much of a turn effect at all. I am almost wondering whether a Trump-inspired laissez faire Fed might not be quite as mindful of companies’ need for liquidity….just a passing thought.
–In any event, both trades received publicity yesterday and both of course are high probability trades. But in terms of profit potential, the option trade could conceivably make 22.5 bps (max) while the double fly could perhaps see a move to -1 or -2.
