Wednesday, May 20, 2015

Last (FOMC) Minutes Positioning



Today there has been about 80,000 July Eurodollar (51 day) 99.50 puts purchased.  The initiating buyer paid 1.25-1.5 to position bearishly in front of the 1:00 pm CST release of the April FOMC Minutes today.  I have advised there is scant likelihood for a bullish surprise from today’s release.  My reasoning is two part; firstly because the market has priced the ‘lift-off’ late this year and secondly because the Fed offered a bullish fixed income surprise at the March FOMC meeting. 

EDU5 trades at 99.59, not far from the recent 99.62 high reached in 3 consecutive sessions ending Monday (see ‘Fed Minutes; Keeping the Market Honest’ for further discussion). 

 

Back of Envelope Pricing of EDU5 with July and Sep FOMC Meeting Rate Hikes:

Current FF Effective

0.12
Current 3mo Libor
0.28

3mo Libor less ff effective

0.16
Effect of July FOMC 25 bp hike on EDU5

0.25
Effect of Sep FOMC 25 bp hike on EDU5

0.23
Current plus July&Sep hike impact

0.76
Pricing EDU for impact

99.24

 

 

Of course July Expiry options on EDU5 expire in 51 days so the market might not be willing to price July and September rate hikes before July options expire (if ever).  However, to learn that the Fed has intentions of moving sooner rather than later may be worth the half tick or so it would cost to buy the 99.50 put paying 1.5 and selling it back after the Minutes release if that report is not bearish.  At an extreme, the put could be worth closer to 25 bps if the economic data starts to rock.   

 

 

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