Euro$ premium squeezed
November 13, 2020
–Yields declined and the curve retreated yesterday. Tens lost 9 bps to end at 88.5. 2/10 finished at 71 bps, down 8 on the day. Stocks took a sharp dip but bounced into the end of the session and are higher this morning.–Trade of the day was a sale of about 70k EDZ22 9962.5c at 10.5. These are long dated, with 767 days until expiration. Settled 11.25 vs 9963.5. Open interest in the strike ended the day at 85k, up 73k on the day. Sales at this level are inexplicable to me. Here’s a guy that has run out of ideas. Assume it’s a sale of 50k at 10.5, then it’s a premium intake of $13.125m, about $17k a day assuming straight line decay.
–Compare these against the year in front, EDZ1 9962c. Those settled 14.25 vs 9975.0. So, if nothing changes, the position slowly rolls against. EDZ1 9975c settled at 4.75 with futures exactly at strike. So if EDZ2 remains at the 9962 strike, then he will make 5.75. In a year. The premium compression this week in eurodollars has been nothing short of spectacular.
–Of course, if the Fed were to hike rates sometime in the next couple of years, these calls will eventually settle worthless. However, in that case, the large short positions in EDH2, M2 and U2 9962 puts will come into play. This strike (9962.5) has been depressed by the buyer of 9975/9962p 1×2’s and settled 3.0 vs 9968.5 in EDH2, 4.5 vs 9967.5 and 6.75 vs 9966.0. To give an indication of just how depressed these levels are, consider EDM2 9962 straddle at 14.0 with 578 days to go. In May, the atm straddle with the same amount of time left (EDZ1) was 23.0. In August, the atm straddle with the same amount of time left was 26.5. These levels represent absolute faith in the Fed to lock short rates where they currently are for the next couple of years. As I mentioned yesterday, China 3-month SHIBOR has risen from 140 bps at the Covid peak, to 300 bps now. Of course, it appears as though China is trying to rein in some financial excesses. That’ll never happen here.
–One other interesting trade worth note, a seller of 30k 0EH 9962 straddle (settled 8.0) vs buyer 3EH 9925p (settled 4.5). Perceptions could still shift to deferred tightening.
