Playing the lottery
January 21, 2021
–Equities surged to new highs on Biden’s inauguration, but fixed income maintains an underlying bid. Tens essentially unchanged at 1.09%. Eurodollar curve out to five years unch’d to -1. However, even though overall action was muted, EDH1/EDH2 one-year eurodollar calendar settled at a new recent low of -0.5 due to a seller of about 40k (9981.0/9981.5). This is the only inverted one-year calendar on the strip, and hasn’t been negative since late September. Forward one-year spreads are increasingly positive as ‘normalization’ is expected. EDH2/EDH3 settled 10.5 and EDH3/EDH4 at 39.0. These forward spreads give an indication of when the market thinks the Fed will actually be tightening, though there have been a smattering of option put spread trades on 2022 and early 2023 contracts just in case the timetable is moved up.
–ECB today. Stocks continue to levitate this morning, though the Russell is slightly underwater as of this writing.
–Implied vol in treasuries remains blanketed. With 30 days until expiration TYH 137 straddle settled 58/64’s just 2.9%. Feb options expire tomorrow with the contract hugging the 137 strike (136-31 settle). Peak open interest in Feb TY puts is at the 137 strike with 149k open. Those puts settled 8; longs have little chance left to monetize them and shorts have every incentive to defend their position by supporting the contract. Asset manager buying of OTM April puts should commence today or next week as Feb expires; something like TYJ 130 puts for 1 (settled 2 yesterday).
–In the administration’s first new initiative for wealth redistribution, the mega-millions lottery is up to $970 million for tomorrow’s draw. It’s not as if a payout like that comes with the same satisfaction associated with the hard work of buying out of the money calls on the next soaring microcap, but it’s a start.
