“What We’ve Seen Is Unprecedented”: “Mysterious” New Whale Emerges In The Market
by Tyler Durden
ZeroHedge.com
Fri, 07/27/2018
A reader who works for a market-making group in the Eurodollar options writes in to describe a new ED market entrant and notes that “what we have seen over the past 3 months is unprecedented.”
WHAT: A mysterious customer has been trading downside put-spread ratios, where they are selling the extra put units. They have done this to the point where they are short MILLIONS of put units in long-dated options. Goldman Sachs has even started taking the other side of the trade for size, but they continue to push it their way (how much capital can they possibly have). Is this why rate vol has collapsed to near record levels?
Consensus estimate among local Chicago trading groups is that this customer is short approx 3 million puts, amounting to 1 million straddles in volatility risk. The capital requirement for this position is estimated to be $1 billion. They continue to add every trading day.
EFFECTS: “It has pushed skew and put volatility well beyond all time lows (see below for recent analysis by a Eurodollar broker).”
POSSIBILITIES: “The trader must have access to huge amounts of capital to sustain such a large position. If interest rates were to rise in any volatility-inducing manner (rise quickly – aka futures breaking), this player could be on the hook for HUGE money. We believe if 2-3 year interest rates rose 1.5-2%, this player would have losses in the billions, and capital requirements would skyrocket.”
The Rest…HERE
