Vol implodes in front of today’s FOMC taper announcement
November 3, 2021
–To give an example of vol implosion yesterday, consider EDZ2 9962.5 calls. On Friday they settled 7.25 vs 9913. On Monday 6.5 vs 9910. Yesterday morning they were 5.5/6.5 vs Friday’s same futures ref 9913. And by settlement, as futures had rallied to 9918 they settled 6.0, DOWN 0.5 from Monday with futures UP 8. The fevered pitch to cover premium broke, as news reports named various hedge funds that had ‘grounded’ traders (and likely covered exposures Friday and Monday). There was early (new) selling of 25k 2EZ 9862c from 8.5 to 9.0, settled 9.0 even as futures rallied 6.5 to settle 9854.5 (EDZ3). A red straddle strip, Z2 9900^, H3 9900^, M3 9875^ and U3 9862,5^ settled Monday at 314. That strip was sold in size of at least 3k down to 285 and settled 295.
–One can conclude that today’s taper announcement by the Fed is expected. However, there were still a few large put spreads bought, for example 0EX 9912/9900ps 3 paid 25k and 0EX 9900/9893.75ps 1 paid 50k. These are on EDZ’22 as the underlying, which settled 9918, and expire one week from Friday. Settles were 2.75 and 0.75. The question is how Powell will respond to high inflation and high asset prices which threaten both stability and equality goals.
–Near euro$ calendar spreads receded from recent highs as reds (2nd yr) led the strip higher, closing +8.375. Blues (4th year) were unchanged on the day and golds (5th year) actually closed down 2.25. 5/30 treasury spread was up 3.7 to end at 81. Tens fell 2.8 bps in yield to 1.547%.
–When I was on the CME floor and a big data release came out, sometimes there was a huge price gap of maybe 10-12 bps in a given contract that would almost immediately revert. As a rule, it didn’t take that long to eventually test those extremes again. I.e, if a market gaps to the downside on unexpected news, it’s because it was unbalanced; there weren’t enough shorts with resting bids to help absorb selling on new information. Even though the market would bounce, maybe for a week or two, those extreme levels are revisited, because the same imbalance has only been temporarily alleviated. It was a tough October for longs in the short end of the curve. For example EDZ2 had a high of 9954.5 on Oct 4 and a low Friday of 9906. Longs have had faith in the Fed’s jaw-boning about tapering not being related to rate hikes, and inflation simply being related to covid. We’ll get the same Fed message today, but the market reaction may not be as charitable.
–Is a sign of the possible broad sentiment change in rate markets is also being reflected politically? Youngkin win in VA, Minneapolis rejects ‘defund the police’.
