Man the harpoons
September 13, 2020
On a week that featured over $100 billion in treasury note/bond auctions, and an announcement that the deficit hit $3 trillion with a month to go in the fiscal year, and with government spending at a record $6 trillion, the ten year yield eased 5.6 bps on the week to 66.6. The week ended with April’22 thru July’22 Fed Funds settling at 100.015, slightly negative yields, going into this week’s FOMC. These were the highest settles so far in September. On the Eurodollar curve, the peak contracts are EDM’21 and EDU’21, both at 9982.5 or 17.5 bps. The first eight ED contracts besides the (new) front Dec’20 are 9980 or higher. Fed officials have repeatedly poured cold water on the idea of negative rates, but the market appears to be pressing for ever more accommodation. SPX has pulled back just 7.5% from the all-time high set at the start of the month, and inflation data appear to be firming. The ten-year breakeven (10y yield – 10y inflation-indexed note yield) has steadily marched upward since March, ending August at 180 and now at 167 (perhaps part of the pullback related to this week’s upcoming auction on Thursday of $12 billion TIPS).
VIX continued to subside from the peak set on Sept 3, closing at 26.9. In a sign of easing stress, the spread between October and Dec VIX contracts narrowed from a high of 7.45 (on 9/3 Oct VIX was 39.0 and Dec VIX 31.55) to just 2.45 Friday (Oct 31.87 and Dec 29.42). We’re going into quadruple witching this week on Friday. The topic of single name equity options trading has recently become hot, with a lot of the discussion concerning Softbank’s positions. In early August, I had heard of some substantial positions being initiated during Asian hours in FB, MSFT, GOOGL and ADBE call spreads, all Nov expiry apart from ADBE in Oct.
75k MSFT Nov 220/240cs
35k FB Nov 250/275cs
20k ADBE Oct 450/490cs
6k GOOGL Nov 1475/1620cs
I am only speculating, but I think those were Softbank buys. Nothing particularly dangerous in being long call spreads. Since then I have read that Softbank’s positions may have been collars, selling puts or put spreads and buying calls or call spreads. Given all the talk of gamma sparking outsized moves, I thought it might be instructive to look at put open interest in expiring Sept options in large cap tech and determine if anything stands out in high gamma positions. On Friday there will be a lot of options with deltas of either one or zero.
I want to insert a disclaimer here: What I am doing is just scanning things on BBG. This was not exhaustive research of going through every strike and position. I am just trying to get a sense of large positions and exposure, because the whole Softbank situation seems to be fraught with dubious information, and stock index futures appear vulnerable to further declines.
First, I looked at Sept AAPL puts. The stock trades 112. The largest open strikes are 112.5p and 115p at 115k and 43k respectively. Just for the sake of math, 1 put is 100 shares, 100,000 puts are 10 million shares. Let’s just use 100,000 options as the example. At a strike price of 112, the notional value is $1.12 billion. On Friday these puts were 3.50 so the total premium in the strike is $35 million (just sticking with the idea of 100,000 open interest rather than actual 115k). These puts are just in-the-money. This strike is of further interest due to volume. As can be seen on the attached chart, the largest daily volume was on August 11, right around the time we suspect Softbank was becoming active in their operations. The volume that day was 50k (red circle), open interest surged to 81k and the premium was just over 7. This information doesn’t tell us whether the initiator was a seller or buyer, but from press reports I am going to guess a seller. Late last week Softbank said they had closed positions. So either this is not them, or they are not being completely truthful. By the way, at least one of the trades mentioned earlier, Nov MSFT 220/240 call spread, is still clearly open from looking at open interest. Oct ADBE call spread still open as well.
As an aside, in this world of interconnectedness, I thought I would ask a couple of interest rate option market makers that work at large multi-product shops, if they had received information from their equity option colleagues regarding large-cap-tech options. Of the few I asked, there hadn’t been communication as to these outstanding positions, which, in my tin-foil covered head, could have ramifications throughout markets. Again, there’s the possibility that conversations did take place and they simply didn’t think it was appropriate to share. My larger thought here is only this: there is a lot of market specialization that in some ways precludes putting together a big picture.
OK so that’s the conspiracy theory. Now I will just mention a couple of other peak open interest Sept put positions. FB closed 266.61, peak puts are 265 and 260 strikes at 15k and 17k OI respectively. MSFT closed at 204, the 230 p is peak at 24k, these appear to have been traded on August 4, and in MSFT’s case there are a decent amount of other strikes with OI of 10-15k. In GOOGL peak is 1500 put with 2600 open, the stock ended Friday at 1515. These were also traded in early August. ADBE trades 471.35, the Sept 450 p has 6k open as the peak; these were traded Aug 7. NFLX 500p have 5.3k open with the stock at 482. There is a fairly large spread of OI across lower strikes. A good deal of volume in the 500p came on Sept 10, when the stock opened 503 and closed 480. Open interest rose on that day in the puts, so they appear to have been protective buys and to have contributed to weakness in the underlying.
The point of this little exercise is only this: Sometimes, it’s just all about positions. Nothing to do with earnings, or business prospects, or macro variables. When the professionals sense a wounded whale with large positions, they get the harpoons out. I am no where near close enough to equity options to know whether that is the case here. However, I suspect it. As Inspector Clouseau said, “Facts, Hercule, facts! Nothing matters but the facts. Without them the science of criminal investigation is nothing more than a guessing game!” In this particular situation, trading action this week will reveal whether there are vulnerable put shorts or not.
Of course, it’s not all just facts. It’s assumptions and bias, greed and fear. We like to think it’s scientific. For example, the Fed on Sept 4, put out a press release regarding stress test results saying it had corrected “…an error in projected trading losses and as a result, revised [lower] the capital requirements for two [large] banks.”… “The loss rates for certain public welfare investments made by large banks were initially miscalculated, resulting in an overestimation of hypothetical losses for those investments.” Capital requirements were trimmed by 1 tenth of one percent for Goldman and 2 tenths for Morgan Stanley. Translation: Worst case scenario you probably won’t lose as much as we thought. (Because over time, housing and stock prices only go up).
OTHER MARKET/ TRADE THOUGHTS
Implied vol in rates ended the week with a thud. I marked TYZ0 139.5 straddle at just 3.7 vol, 1’50 vs 139-19. As mentioned, VIX declined on the week as well, and the treasury auctions sailed through clear waters. What does bear watching is the persistence of bond vol being relatively high as compared to shorter maturities. For example DV01 on TYZ is $91 per contract and on USZ is $216, so 2.4x. TYZ vol is 3.7. Multiplying that ratio by TY vol is 2.4 * 3.7 or 8.9, while USZ vol is actually 10.4. This is one of the few pockets of the market that seems to strongly convey the idea that either inflation might take hold, or that supply might actually cause a price concession, or perhaps both.
| 9/4/2020 | 9/11/2020 | chg | ||
| UST 2Y | 14.9 | 12.7 | -2.2 | |
| UST 5Y | 30.1 | 25.0 | -5.1 | |
| UST 10Y | 72.2 | 66.6 | -5.6 | |
| UST 30Y | 146.5 | 141.7 | -4.8 | |
| GERM 2Y | -70.0 | -69.3 | 0.7 | |
| GERM 10Y | -47.2 | -48.1 | -0.9 | |
| JPN 30Y | 60.6 | 57.8 | -2.8 | |
| EURO$ Z0/Z1 | -5.0 | -9.0 | -4.0 | |
| EURO$ Z1/Z2 | 5.5 | 3.5 | -2.0 | |
| EURO$ Z2/Z3 | 14.0 | 13.0 | -1.0 | |
| EUR | 118.40 | 118.48 | 0.08 | |
| CRUDE (active) | 39.77 | 37.33 | -2.44 | |
| SPX | 3426.96 | 3340.97 | -85.99 | -2.5% |
| VIX | 30.75 | 26.87 | -3.88 | |
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200904a.htm
