Options Traders Pile Into Hawkish Fed Wagers Eyeing 5% Peak Rate

Sep 16, 2022

Lead Stories

Options Traders Pile Into Hawkish Fed Wagers Eyeing 5% Peak Rate
Edward Bolingbroke – Bloomberg
This week’s hawkish repricing of expectations for the Federal Reserve’s policy rate path has been spearheaded by a handful of wagers that the peak will be around 5%, and possibly higher.
Since Tuesday — when August inflation data was full of lofty surprises — volumes in eurodollar and SOFR interest-rate options have been running at 1.5 to 2 times recent average levels. In aggregate, they’ve priced in a higher peak for the policy rate of 4.5% in March. However several notable trades appear to anticipate a peak in the range of 4.75% to 5.25% — rates last seen in 2007.

Wall Street’s ‘fear gauge’ creeps higher as stock sell-off deepens
Saqib Iqbal Ahmed – Reuters
Investors’ anxiety about stock market turbulence is fast approaching levels associated with heightened fear as the S&P 500 looks set to wrap up its worst weekly showing in three months.
The Cboe Volatility Index (.VIX) – which is known as “Wall Street’s fear gauge” and which measures the expectation of stock market volatility as expressed by options prices – was up 1.38 points to 27.65, after hitting a two-month high of 28.45.

Wall St on course for worst week in months amid mounting slowdown fears
Stephen Culp – Reuters
U.S. stocks tumbled to two-month lows on Friday as a slowdown warning from FedEx hastened investors’ flight to safety at the conclusion of a tumultuous week.
All three major U.S. stock indexes slid to levels not touched since mid-July, with S&P 500 sinking below 3,900, a closely watched support level the benchmark index has tested in recent weeks.

Commodities Volatility Will Make Earnings Hard to Read: Moody’s
Irene Garcia Perez – Bloomberg
Big swings in commodity prices will make it harder for investors to assess how businesses are performing and risks linked to counterparties, according to a report by Moody’s Investors Service.
That’s because the way companies report the impact of those prices varies widely, while they tend not to disclose who their counterparties are or what derivative contracts they have in place.

Traders Hedge on Yen Rebound Ahead of Bank of Japan Meeting
David Finnerty – Bloomberg
Traders are scurrying to hedge against potential gains in the yen, spurred by fears of intervention and uncertainty surrounding next week’s Bank of Japan policy meeting.
The yen rallied 0.4% against the dollar Friday as investors position ahead of the BOJ’s Sept. 22 policy decision. Some are placing hedges in the option market, with the premium to protect against a sharp gain over the next week compared to a decline jumping to the highest level in three months.

Gold dips to 2-year low on US rate rise fears
Leslie Hook – Financial Times
Gold prices dipped to their lowest in more than two years on Friday, as expectations of a significant US interest rate rise next week, along with a strong US dollar, weighed on prices.
With bond yields expected to go higher, some investors have sold out of gold and moved into other assets, particularly dollar-denominated ones.

The boss of a ‘Black Swan’ fund warns the Fed’s rate hikes could cripple markets and the economy – and cause a bigger problem than inflation
Theron Mohamed – Business Insider
The Universa Investments boss cautioned higher interest rates could turn inflation into deflation.Spitznagel questioned whether the Fed will be able to stop a widescale crash if it causes one.
The Federal Reserve’s efforts to crush inflation risk sparking a collapse in asset prices, and plunging the US economy into a severe recession with painful deflation, Mark Spitznagel has warned.


CME Group FX Futures and Options Reach New Volume and Open Interest Records
CME Group
CME Group, the world’s leading derivatives marketplace, today announced its foreign exchange futures and options reached a new single-day volume record of 3 million contracts on Sept. 14, 2022. This was the first time CME Group FX futures and options traded more than 3 million contracts in a single day and was 7% higher than the previous record of 2.8 million contracts set on Dec. 3, 2020. Open interest (OI) for CME Group FX futures and options also reached a record high of 3.3 million contracts on Sept. 8, 2022, up 17% year-on-year and reflecting a notional value of around $295 billion.

Sporttrade launches First and Only Regulated “Sports Trading” platform in New Jersey
Sporttrade Inc.
Sporttrade, a Philadelphia-based sports betting technology company, has officially launched its sports betting exchange in New Jersey. This positions Sporttrade as the first and only dynamic sports trading marketplace in the United States. Eligible customers can use Sporttrade to trade in and out of positions on sports outcomes much like they would trade stocks, options or cryptocurrencies.

Watch Now: ‘About Ovation’ Video
Options Clearing Corporation
For nearly 50 years, OCC has provided financial stability and risk management to the U.S. listed-options marketplace. By modernizing our technology infrastructure and replacing our legacy system, we will be able to streamline our operations, optimize our services and tools, further enhance our cyber security, improve our operational resiliency, and maintain long-term sustainability as a Systemically Important Financial Market Utility (SIFMU) for years to come.

ESG at Cboe
Environmental, Social and Governance risks and opportunities continue to grow as organizations disclose more about their business practices and demonstrate their values through action.
We are committed to empowering market participants of all types with the information, data and tools they need to navigate the next generation of risk.

Equity Derivatives: Introduction of Equity Options, Single Stock Futures and Single Stock Dividend Futures; Eurex Circular 090/22 Equity Derivatives: Introduction of Equity Options, Single Stock Futures and Single Stock Dividend Futures
Introduction The Management Board of Eurex Deutschland took the following decisions with effect from 4 October 2022: Introduction of ten Equity Options pursuant to Annex B to the Contract Specifications (Attachment 2); Introduction of 34 Single Stock Futures pursuant to Annex A to the Contract Specifications (Attachment 2); Introduction of two Single Stock Dividend Futures pursuant to Annex D to the Contract Specifications (Attachment 2); Further changes to Annexes to the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland pursuant to Attachment.

Regulation & Enforcement

Federal Court Orders Defendants to Pay More than $6.6 Million for Defrauding Binary Options Pool Participants
The Commodity Futures Trading Commission announced that on August 29, the U.S. District Court for the Northern District of Illinois entered a judgment against William Thomas Caniff, a resident of Ohio, and his company, Berkley Capital Management, LLC (BCM), a Wyoming limited liability company with offices in Ohio, and two investment pools that BCM operated as Delaware limited partnerships with offices in Wintersville, Ohio, BBOT 1, LP (BBOT) and Berkley II, LP (Berkley II).

CFTC chair asks senators for more authority in crypto markets
Kollen Post – The Block
The Commodity Futures Trading Commission Chair Rostin Behnam told senators Thursday that legislation before the Senate Agriculture Committee would give his agency more insight into how cryptocurrency markets function.

Ether’s New ‘Staking’ Model Could Draw SEC Attention
Paul Kiernan and Vicky Ge Huang – WSJ
Ethereum’s big software update on Thursday may have turned the second-largest cryptocurrency into a security in the eyes of a top U.S. regulator.
Securities and Exchange Commission Chairman Gary Gensler said Thursday that cryptocurrencies and intermediaries that allow holders to “stake” their coins might pass a key test used by courts to determine whether an asset is a security. Known as the Howey test, it examines whether investors expect to earn a return from the work of third parties.


Stock-market bears seen keeping upper hand as S&P 500 drops below 3,900
William Watts – MarketWatch
The S&P 500 index on Friday broke below a closely watched support level that could augur a deeper slide, chart watchers warned.
Technical analysts have identified the 3,900 level as the bottom of an important range of support for the large-cap benchmark. The S&P 500 ended Thursday at 3,901.35 as stocks stumbled in the afternoon. It extended losses Friday, falling 1.6% to trade below 3,840 after a stark profit warning from shipping giant — and economic bellwether — FedEx Corp. rattled investors.
The Dow Jones Industrial Average dropped nearly 400 points, or 1.3%.

The stock market’s trend is relentlessly bearish, especially after this week’s big daily declines
Lawrence G. McMillan – MarketWatch
The stock market took a tumble Sept. 13 when a monthly government report showed inflation is widespread throughout the economy.
One might have thought that professional traders would have anticipated such a possibility, but the euphoria leading up to the announcement had been too much.


The TINA Argument for Stocks Is Getting Obliterated by High Cash Yield
Matthew Fox – Markets Insider
Over the last decade a big argument for buying stocks was the fact that interest rates were at rock bottom, leaving few alternatives for investors.
But now, the “there is no alternative”, or TINA, argument for stocks is getting obliterated.

Pricing of Stock Trades Varies Widely Among Popular Brokers, Study Finds
Alexander Osipovich – WSJ
Brokerages aren’t created equal when it comes to getting investors a good deal on trades.
A recent academic study found wide disparities in the prices that investors get when buying and selling stocks through a half dozen popular brokerages. TD Ameritrade delivered the best prices, the study found, followed by Fidelity Investments, E*Trade and Robinhood Markets Inc.
In a surprise to some investors, at the bottom of the pack were a pair of trading platforms from Interactive Brokers Group Inc.—a brokerage catering to day traders that has long touted its execution quality.

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The Spread

OCC liquidity risk doubles to all-time high in Q2

Lead Stories OCC liquidity risk doubles to all-time high in Q2; Concentration of activity around June expiration responsible for record rise Joshua Walker - Risk.net The estimated largest payment obligation Options Clearing Corporation (OCC) could have faced had a...

Past Options Newsletters

OCC liquidity risk doubles to all-time high in Q2

OCC liquidity risk doubles to all-time high in Q2

Lead Stories OCC liquidity risk doubles to all-time high in Q2; Concentration of activity around June expiration responsible for record rise Joshua Walker - Risk.net The estimated largest payment obligation Options Clearing Corporation (OCC) could have faced had a...

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