Midcurve euro$ put vigilantes
May 17, 2021
–Large new buyer Friday of 2EN 9900p for 5.5 to 6.0. Over 100k traded, and open interest rose nearly 64k to 97k. The underlying contract is EDU23, the first contract after the June 2023 cessation of libor. However, these options expire in just 60 days on July 16, which captures the next two employment (and CPI) releases and the June FOMC. The key takeaway is that there is increasing sentiment that the Fed may have to accelerate plans to remove accommodation. The larger related trade concerns buying in 3EU puts, namely 3EU 9800 put which has 485k of open interest. For the sake of comparison, consider 2EN 9900p vs 3EN 9837.5p. Both expire July 16. 2EN has EDU23 as underlying, at a price 9916.0. 3EN has EDU24 as underlying, at a price of 9854.5. Therefore, 2EN 9900p are 16 out of the money and 3EN 9837.5p are 17 out. The futures spread is 61.5. While 2EN 9800p settled 6.0, 3EN 9837.5p settled 9.0. At-the-money straddles are 2EN 9912.5 at 22.5 and 3EN 9850 at 31.0. Straddle premium as a percentage of strike price (yield) makes 2EN seem a bit expensive, that is, 22.5 divided by 87.5 strike price is 25.7%, while 31 divided by 150 bp strike is 20.7%. Obviously the key in either case rests on whether the Fed can withstand an onslaught of bad inflation indicators.
–Longer term yields fell on Friday with tens down 3.2 at 1.637%. In spite of increased fighting in Gaza, TYM is nearly unchanged this morning at 132-155 (settled 13).
–Gold is getting a boost at the expense of crypto. Institutional players that have recently embraced bitcoin are now cringing because Musk exposed the fact which everyone already knew: acceptance of bitcoin might tarnish ecological credentials. And we can’t have THAT. June gold back up to 1850 this morning, re-visiting levels from early Feb.
–U of Mich one-year inflation expectations soared to 4.6%, equaling the spike in early 2011. Empire Mfg expected today at 24 from a strong 26.3 last.
