Yields higher, but not TOO high
October 21, 2020
–Themes on the day were somewhat at odds with each other, vol selling in TY and curve steepening. Early yesterday morning there was an exit seller of 10k TYZ 140c at 15, settled 13 vs 138-225. Then a huge TYZ0 put tree was bought, >50k 139/138/137.5 put tree (+1/-1/-1) for 3/64 vs 138-24 with 7 delta. Puts settled 54/28/19 so 7 on the package. Ignoring the futures hedge, max value of the tree is 64/64s less premium paid, between 138 and 137.5, with a bleed below the lowest strike. The 137.5 strike is approx 13.5 bps away, equating to around 93 bps in cash tens. (Ten year yield was up 3.8 yesterday to 79.7). Finally, there was a seller of 31k TYF 136.5/139.5 strangle at 44/64, where it settled vs TYH0 138-115. Jan options expire on Christmas eve; the 136.5 strike is around 1% in terms of yield. While these trades indicate limited downside, gold euro$ contracts (5th year forward) made new lows yesterday, settling at the lowest levels since mid June. EDH24, Blue March, which has seen heavy midcurve put activity, settled at 9945 and prints 9944 this morning, also a new low since mid-June. Weakness at the back end of the curve translated into curve steepening. 2/10 was up 3.8 to a new recent high of 65.2; the double top from earlier this year is just over 68 bps. 5/30 closed over 126 bps (new high) and red/gold pack spread gained 3.75 with reds down just 0.5 and golds -4.25. So, as the curve approaches new highs on the year, vol sellers appear to feel yield increases are capped.
–One other side note. While Jan treasury options are gaining open interest, the still expire in December. March options are open and will become increasingly liquid, but expire in February. Currently only about 1k TYH puts in open interest.
–Yesterday I mentioned the red to blue pack spread which was around 28 bps, or the equivalent of just one hike over 2 years. Reds are EDZ1 thru EDU2 and blues Z3 to U4. That spread widened a bit yesterday to 30.875.
–In stocks it’s all about stimulus. Price action is quite choppy. NFLX disappointed with their earnings report as the COVID boost fades. TSLA today.
Picture of TYZ tree payout…courtesy of Pricing Monkey
