Excell with Options: Trading Volatility in the Treasury Market
Executive summary
Rich Excell discusses upcoming market events like the FOMC meeting, housing market data, Empire Manufacturing, and Treasury auction and describes various scenarios one could position themselves.
Image 1: Implied volatility term structure
Often, I sit down to write the Excell with Options and there may be a compelling story already unfolding. Perhaps this is in the news, events, or catalysts on the horizon. Maybe it is in the price action of the underlying itself. This time as I sit down, I think the most compelling ideas that are coming from the 10-year futures and options market revolve around the implied volatility term structure itself. I can see just in the front part of the curve going out a few weeks, there are a wide variety of prices ranging from 5.75 up to 7.31. Of course, these are often driven by economic events and by the influence of weekend days on the short times to expiration. For a trader, understanding how to navigate, and perhaps profit, from this term structure can be very useful.
Image 2: Snapshot of the economic data releases
When I see such a wide spread of implied volatility, the first stop I usually make is to the Dashboard within QuikStrike. From here, I can look at the economic releases for the given period to determine what the market is trying to price in and whether I agree with that differential in pricing. Once on this page, I can choose the filter at the top to see what I want to see. In this example, I have chosen the entire month of December (not shown here because it would be too large). As I scan the month of December, there are several well-known events that traders are most likely bracing for: nonfarm payrolls data on Friday, December 8, and the FOMC meeting on Wednesday, December 13. However, there are several other catalysts that the market may not be as focused on that may be of consideration as well: Empire Manufacturing, which is thought to lead the economy, on December 15; housing market data from NAHB, MBA and building permits December 18-20; and Treasury auctions every Monday and Thursday throughout the month. Sometimes, it is these other events that the market is not initially focusing on that could prove to be the bigger movers of a market. For example, if the debate is about hard vs. soft vs. no landing, that housing market data and Empire Manufacturing may prove to be the most important news of the month. If the market is worried about the U.S. government’s ability to successfully fund, each Treasury auction is a potential catalyst.