Halister News

(Bloomberg) -- The dichotomy in eurodollar options activity goes beyond anticipating what the Fed will say next week; traders are exiting positions amid increased uncertainty about Brexit and the global economy, while others are betting on rising volatility in the longer-dated midcurves.

• “It’s not that people are moving out the curve, it’s that they’re getting out,” says Rocco Chierici, senior VP of fixed income group at R.J. O’Brien
  • “Overall they’re taking positions off because they’re not confident right now. It’s not just the Fed or Brexit, it’s the slowing of the economy”
  • Related story: Traders pull “singed fingertips” from markets as risks escalate
• Large positions remaining are those looking for 1 rate hike in Dec.; Dec. put open interest down ~156k since June 3
  • NOTE: Fed fund futures fully pricing next rate hike around June/July 2017; Jun17 implied rate 61bps, Jul17 63bps, near midpoint of 50-75bp target range
• Gold eurodollar mid-curve options have “come back into play,” with open interest +150% since March, +20% since beginning of June, Todd Colvin, senior VP at Ambrosino Brothers, writes in note
  • Short-term structured bullet flatteners are the “trade du jour and given the recent increase in gold mid-curve option open interest, suggests this may be more than a hope trade”
  • This week’s trades have included buying of covered risk reversals (buying calls, selling puts) and at-the-money straddles in the hope that volatility will no longer remain “stubbornly low”
• “More accommodative policy from BOJ and ECB and tough talk but no action from the Fed have kept vols in check, but have we reached the end of the line?”: Colvin
  • “The mere fact that Fed speakers continue to talk of multiple rate hikes in 2016, despite going 0 for 3 year- to-date and last week’s horrible employment report, suggests a disconnect”
• Options activity, according to Chicago-based independent broker Dan Grant:
  • GFI paid 51-51.5 on 9k blue Dec 86 straddles, “volatility rising”
  • On June 9 there were liquidations in July calls and puts, green Sep calls and short Dec puts; additions in Aug puts, short July puts and purple Sep puts