Feel-good
May 18, 2023
–June’23 SOFR options expire 16 June, four weeks from tomorrow. SFRM3 settled 9486.5, or 5.135% with EFFR pegged at 5.08% (9492.0). The contract has 1.296 million open. What is pretty amazing is the amount of put open interest on SFRM3, a total of 5.146 million. Over 900k puts traded yesterday. For example, a buyer of >50k SFRM3 9493.75/9487.5/9481.25/9475p condors bought for 2.0. This trade has max value of 6.25 bps between the middle strikes, and max loss of premium paid. It’s not that I believe there will be some sort of squeeze; it’s pretty clear that the Fed has squashed expectations of an ease at the July 26 meeting with August FF settling exactly at 9492.0. However, it is somewhat interesting that SFRM3/U3 calendar is -25, with SFRU3 9511.5. Attached below is an image of players from @PNTOptions.
–Overall, vol down pretty hard. Example, SFRH4 settled 120.5 (9600^ vs 9602.5) vs 9612.5^ on Tuesday at 122.5. Just considering atm puts: SFRU3 settled 9511.5; 9512.5p 27.75, breakeven at 9484.75. SFRZ3 settled 9552.0; 9550p 46.0, b/e 9504.0. SFRH4 9602.5; 9600p 59.0, b/e 9541.0. Clearly expecting eases over time, and if one thinks the Fed can hold the line, there are some attractive put structures.
–Jobless Claims today expected 252k from 264 last. A print above 270 would be more indicative of weakening labor. Both HD and TGT (yesterday) have warned of slowing retail sales trends. Powell and Bernanke tomorrow, but the groundwork has already been done by various speakers: no reason to think rate cuts will occur and the banking system is sound and resilient.
–Feel good rhetoric on the debt ceiling helped spark a bid in stocks, with continued flows into AI. For example NVDA closed above 300, more than doubling since the start of the year.
–To their credit, not even trying to hide it any more. Here’s a proposal from members of Chicago Mayor Brandon Johnson’s transition team.
