Late SOFR/Treasury Option Roundup: Preparing for Less Dovish Policy

SOFR options segued from early call interest to puts in the second half - following Treasury options lead Tuesday as accounts looked to hedge against a potential unwind in current rate cut pricing at tomorrow's FOMC policy annc.

• Note, underlying futures are mixed after the close, short end weaker/curves flatter (2s10s -5.442 at -30.256). Flattening partly a function of ongoing long-end support after US Tsy cut Q1 borrow est's from $816B to $760B late Monday, and position squaring/unwinds of projected rate cuts in H1 2024.
• Projections have receded: January 2024 cumulative -.5bp at 5.324%, March 2024 chance of 25bp rate cut -40.7% vs. -46.5% this morning w/ cumulative of -10.7bp at 5.222%, May 2024 at -78.4% vs. -82.7% earlier w/ cumulative -30.3bp at 5.026%, June 2024 -94.6% vs. -98.1% earlier w/ cumulative -53.9bp at 4.790%. Fed terminal at 5.325% in Feb'24. Salient trades include:
• SOFR Options:
  • Update, -16,500 SFRZ4 96.25/97.00/97.75 call flys vs. SFRZ4 94.87 puts from 3-2.25
  • +8,000 SFRG4 94.75/94.81 2x1 put spds 1.0 vs. 94.89/0.05%
  • +5,000 SFRM4 95.12/95.37/95.62 put trees, 5.25, 1.0 still bid
  • Block, 5,000 SFRG4 94.87/94.93 1x2 call spds, .25 net ref 94.87
• Treasury Options:
  • 10,000 TYH4 110.25/111.25 put spds, 24 (adds to appr 55k on screen/50k Block earlier)
  • 5,000 FVH4 106.25 puts, 4
  • Block, 8,000 TYH4 109.5 puts, 9 vs. 111-14.5/0.14%
  • Block, 15,000 TYM4 109.5 puts, 43 ref 112-03
  • +15,000 TYM 109 puts, 36
  • 8,000 FVH4 108 puts ref 108-02.25
  • **Block +51,000 TYH4 110.25/111.25 put spds 21; traders +50,000 on screen at 20 just after