The image you are looking at does a decent job of replicating how derivative trading works on the trading floors in Chicago. Around 7:55 a.m.c.s.t. today Credit Suisse First Boston started selling May 10yr. 126.5 calls. Initially the 10yr. note futures were trading around 12229 when the sold the 1st 1,000 or so. Locals were willing to buy the calls as long as they could sell the futures at 12229. This produced a volatility level of 7.64% (smaller clock on the upper right corner of the diagram above). As they continued to sell the market started to rally and locals were able to sell the futures at ever higher levels. Credit Suisse was not able or did not attempt to adjust the price they were selling the option at or perhaps locals were not willing to buy them at a higher price, so the option price remained at .04 down 3 tics on the day (larger clock on the middle right of above diagram).
Now as the excitement and competition started to heat up as the 10yr. note pit, which is only a few feet from the 2yr. note pit, eventually locals were able to sell the 10yr. note future at a price of 12303 to hedge their position of getting long the May 126.5 calls the Credit Suisse was selling. This is very real money by the way. For example lets say you traded with Credit Suisse when they initially started selling the option and you sold futures @ 12229. Now as the market rallied and you bought more of the options at the same price 4 tics, you were now able to sell futures @ 12303 9 tics higher than your initial level. That is an improvement in dollar terms of $281.25 per contract, "If you did 100 of these which is typical for market makers to trade your improvement is $28,125.00, I don't know about you but to me that is not chump change." Now getting back to the 2yr. notes and its proximity to the 10yr. option pit, at the time that this large selling was occurring in the 10yr. options, a dealer was bidding 3 tics to buy the June 108 put in the 2yr. note options. Now again looking at the sharp drop in volatility that occurred as a result ot the large seller of calls in 10yr. options 7.64% to 7.32%, the locals in the 2yr. pit sensed that over all volatility across the yield curve, or at least the 2yr. - 10yr. sector of the curve would decline as well, and they quickly sold the bid in the June 108 puts, which produced a volatility level of 1.63% (clock located on the lower left of the above diagram). By uploading and monitoring trading activity via the accutic alerts you too can monitor changes in volatility levels that occur each and every day on the dynamic trading floors in Chicago. Contact us @ www.accutic.net.
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