Wednesday, February 11, 2015

EDM5; Spirited, though still behaved...for a time

EDM5 is unchanged on the day, consolidating like the balance of the U.S. fixed income curve.  EDM5 has remained at the lower end of Friday’s range, a sell-off I predicted with the settlement the day before below 99.62. 

The bearish downward sloping arrow I drew on Wednesday, February 4th is consistent with the pace of decline envisioned.  We are again on that line and expect the risk for a bearish adjustment is once again rising. 

This morning, additional bearish positioning is being conducted using a popular EDM5 99.625 - 99.50 put spread 1x2.  This structure traded 1.75 for 30,000 or so today, having traded at 1.5 for 15K or so the other day.  The largest size was purchased within an 8 or so day period ending last Thursday paying 1 - 1.25 for roughly 220,000. 

While somewhat friendly to this form of positioning, I have growing concern that a strong move lower in EDM5 shall cause significant stress for the short position holders in the 99.50 strike.  This is why I have instead viewed short positions using the 99.50 strike alone as an attractive option.  There is clearly a possibility that the holder(s) of this 1x2 put spread will roll down a strike adding value to the 99.50 strike and exciting interest in the 99.375 strike.  With EDM futures at 99.57-.575, the 99.50 put is 3.75 / 4 and the 99.375 put is 1.5 / 1.75.  The 99.50 99.375 put spread is 2 / 2.5.    

There are 58 day left in EDM5 options and it is easy enough to imagine that over that time there shall be additional news that prompts greater pricing for a June FOMC ‘lift-off’.  

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