The Next Big Treasuries Shock Could Come From Huge Option Position

Jan 19, 2022

Lead Stories

The Next Big Treasuries Shock Could Come From Huge Option Position
Edward Bolingbroke – Bloomberg
The potential catalyst for the next leg higher in Treasury yields is hiding in plain sight in the options market, where a single put strike expiring next month has exploded in size since the start of the year.
While the bearish option remains out-of-the-money, or uneconomical to exercise, falling prices for 10-year Treasury note futures are nearing the option strike price. Should they get there, hedging by dealers that are short the option could send yields to new highs.

How to Use Options Spreads to Minimize Risks Amid Rising Volatility
Vicky Ge Huang – Business Insider
All of a sudden, the prospect of as many as four Fed rate hikes in 2022 has become the consensus on Wall Street.
The dramatic repricing pushed yields on the 10-year US Treasury note to a two-year high of 1.85% on Tuesday, while the S&P 500 and Nasdaq ended the day shedding 1.8% and 2.6%, respectively. The crypto market was also off to a rocky start as its total market capitalization declined 1.17% over the last day to $1.98 trillion, according to CoinMarketCap.

Nasdaq Composite Slumps Toward Correction After Two Months Without Record
Rising yields and anxiety earnings growth is poised to slow dealt another gut punch to tech stocks, pushing the Nasdaq Composite Index to the brink of a correction.
The tech-heavy index slumped 2.6% Tuesday, taking its drop from the November 19 record to 9.7%. The two-month drought without a record is the longest since April 2021. Along the way, the gauge surrendered a key technical level, the average price over the past 200 days, for the first time since the aftermath of the pandemic bear market in 2020.

The VIX Spikes As Interest Rates And Oil Prices Rise
JJ Kinahan – Forbes
Rising interest rates and oil prices, with a few misses by big financial companies like Goldman Sachs (GS), appear to have been too much for investors who were selling stocks on Tuesday. The VIX (Cboe Market Volatility Index) rallied 18.76% to 22.79, reflecting a rise in investor uncertainty around the financial markets. The S&P 500 (SPX) fell 1.84% as investors sold stocks. However, investors were also selling bonds, driving the 10-year Treasury yield (TNX) up 5.25% to 1.865%. In contrast, the 10-year yield was closed at 1.343% on December 3, 2021, which was its most recent low.


Global futures and options trading hits another record in 2021
FIA today released statistics on the number of futures and options traded on exchanges worldwide in 2021, which marked the fourth consecutive year of record-setting trading activity.
The total volume of trading reached 62.58 billion contracts in 2021, up 33.7% from the previous year. Futures trading rose 14.6% to 29.28 billion contracts. Options trading jumped 56.6% to 33.31 billion contracts.
Open interest, which measures the number of outstanding contracts at a point in time, was almost unchanged. At year-end, open interest stood at 1.076 billion contracts, up 2.6% from 1.048 billion contracts at year-end 2020.

MGEX Reports Trading Results For December And Full Year 2021 – Sets Annual Futures And Options Volume Records
Minneapolis Grain Exchange (MGEXTM), a Designated Contract
Market (DCM) and Derivatives Clearing Organization (DCO), today reported record 2021 trading volume of 3,873,016 contracts, a 40.0% increase from 2020 and the highest annual total ever.

Interactive Brokers Reports Q4 Revenue Miss
Sam Boughedda –
Interactive Brokers Group Inc (NASDAQ:IBKR) announced earnings per share of 83 cents on revenue of $603 million. Analysts polled by anticipated EPS of 83 cents on revenue of $671.17 million. IBKR’s commission revenue increased $32 million, or 11%, from the same period last year on higher customer options and futures trading volumes and higher average per share commission in stocks.

Regulation & Enforcement

Developing Contractual Standards for Crypto Derivatives
The extraordinary growth of crypto assets in recent years has become one of the defining features of modern finance. With a market value of around $3 trillion, this is now a well-established asset class that is increasingly attracting the attention of institutional investors and banks. As in any wholesale market, over-the-counter (OTC) derivatives have a vital role to play in broadening market access, facilitating risk management and price discovery, deepening liquidity, and providing greater certainty and flexibility to market participants.


Dwindling OPEC+ Spare Capacity Sets Oil Up for Sizzling Summer
Grant Smith – Bloomberg
As they strain to restore oil production, OPEC and its allies are being left with a diminishing buffer of spare supplies — potentially setting up crude prices for a sizzling summer.
With depressed investment and internal unrest hobbling coalition members from Nigeria to Russia, the task of satisfying the vigorous recovery in world fuel consumption is down to just a few Middle Eastern producers. As they raise production, the buffer of untapped supplies held back to cover any emergency disruptions will grow ever-more precarious.


A year on, we haven’t absorbed the lessons of the GameStop saga
Gillian Tett – Financial Times
This time last year I walked into the offices of a car rental company in Queens, New York, to hire a vehicle. Quite unexpectedly, I ended up in a rather animated debate, not about the sky-high price of rental insurance contracts but about share prices.
As I filled in my forms, I let slip that I was a financial journalist. Before I knew it, I was bombarded with questions from the staff — and even other customers — about the share price of an electronics retailer called GameStop.


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