As I have noted below, there have been a number of 5-10 point rallies since the decline in Eurodollars started last July…and I can tell you that in each of these normal “retracements”, I have watched put option prices drop relatively sharply as analysts and investors REPEATEDLY “shunned” them in connection with their STILL ongoing attitude that rates will only be going up at a snail’s pace…
In general, they weren’t expecting the December 14th raise, and even then, they were overwhelmingly of the opinion that the NEXT raise (just done in March) would not come again until June…And now? They STILL are only expecting ONE raise in the next six months between now and September.
I think this is nuts…Normal, for the way the mob (sheep following) psychology of the markets actually works…But NUTS.
Literally, any day now, I believe that we are going to see another “leg” down in Eurodollars…perhaps quite similar, as I have drawn, to what we saw in November and December…which leads me to think that the 9850 September puts, currently at 6.00 points, or $181 each, represent monster leverage…
I may be wrong but I have to believe this chart is NOT going to just trade sideways all the way until September…
I think the idea of rates staying the same could only occur if the economy was about to come to a screeching stop…And I would currently judge that as bordering on the impossible…Housing, Vehicles, Construction, Retail, Technology, Energy, Airlines, etc…WHERE is there any evidence of anything even close to weakness? It’s spring…The roads, malls and airports have been jam packed…and are going to stay that way. Consumer debt has been reduced. Stocks are up. Job growth is up. CONFIDENCE IS UP…And none of that is going to be changing any time soon.
THE ECONOMY IS STRONG…AND MAKE NO MISTAKE…THE TRUMP-CONGRESS TEAM WILL SOON BE PUMPING LIKE CRAZY…AND FOR THIS AND OTHER REASONS (LIKE INFLATION FOR ONE) I SAY RATES CAN ONLY BE GOING UP.
I LOVE THE SEPT 9850 PUTS…At 6.00 ticks…$181…as, strictly by the numbers, with ANY continuation of the downtrend, down at just at 95.32 they have already become a triple…And I obviously think we are going a LOT further than that. Just as obviously, if this market does just lay here and go nowhere, as it says below, this option could end up worthless.
The bottom line is, Eurodollars are now up a barely perceptible 6 ticks above their close from 6 days ago. Since then, however, the price of the Sept 9850 put has dropped from 9.0 to 6.0 points, representing a 33% decline in value. This sharp change in price suggests to me that I am buying something that NOBODY else seems to want... And in my experience, this is a GREAT sign.
I continue recommend buying puts…either as a totally new position…or to add to an existing one.
Give me a call if you want to talk about it.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars