Goldman Recommend Selling EDH3 96.25 Calls

Goldman Sachs note that “upside surprises in both the CPI and retail sales reports have left markets pricing a roughly 15-30% of a supersized 100bp hike at the upcoming FOMC meeting. Much of the move occurred following the CPI report, where price pressures were broad based; our economists believe the nearly four decade high rent reading poses upside risk to the path of Fed funds in the second half of this year. Indeed, in addition to increases in hike pricing for the next meeting, market-implied terminal rates, which were within our economists’ baseline 3.25-3.50%, repriced about 20bp higher (though this was also partly driven by the Bank of Canada’s surprise 100bp hike). Fed speakers since then have suggested that ‘at least’ 75bp of tightening was likely, and highlighted the desire for ‘risk management’ around inflation. Absent guidance to the contrary, in our view, that messaging will cause markets to maintain some premium for a 100bp hike for July, a healthy premium for another 75bp hike in September going into the upcoming meeting, and presents some asymmetry to the upside to terminal rate pricing. That is, it should limit the scope for rallies at that part of the curve, and we therefore recommend monetizing still elevated vol by selling near at-the-money calls on EDH3.”

• In terms of details, they recommended selling EDH3 96.25 calls at 0.51, with a target of 0.30 and stop set at 0.65.