I don’t know what is more fascinating my lack of intelligence or the sophistication of the market as a whole. In order to avoid further embarrassment I will focus on the latter. So we get news that the haircuts are fairly drastic – however because banks can avoid taking the “markdown” it becomes a game of reading the tea leaves. The incentive to maintain the value of your firm and avoid problems is clear and present, therefore you may choose to only right down a minimum amount of your true exposure. However the clear and present danger in doing that is failing to get help that is being made available now and risk being in much worse shape down the road.
So the markets now are estimating that for each bank that “fails” the stress test means in reality that as many twice that number are in equal if not worse danger. As these realizations leak out the markets in terms of the value of the euro for one proxy sell off. It went from 12960 area to 12796 area fairly briskly already this morning – so anyone that was not expecting some joy rides in the market today may want to reach below the seat and obtain the “barf bags”. Below you will see some put buying as participants taking out some insurance against a rise in interbank lending rates that could well result from poor stress test results.
Larger flows in ED options an straddle update below:
| 7/22/2010 | |||||
| Screen this a.m.: | |||||
| shrt dec 81/86 p/s trades 7, 9000 | |||||
| edu0 9950 straddle trades 13.5, 250 | |||||
| shrt sep 87/90 p/s trades 3.5, 500 | |||||
| edh1 9900 put trades 8.5, 1000 | |||||
| shrt sep 9900 put trades 6.5, 350 | |||||
| shrt aug 9912 put trades 7, 350 | |||||
| Open Outcry | |||||
| Paper | B | 1,000 | EOG87/88/90 pfly | 1.5 | N/A |
| TJM | B | 10,000 | EOU87/90 p1X2 | 1.5 | 9912 |
| Paper | B | 500 | EDH188/91/93 p fly | 1.5 | 9941 |
| Paper | S | 300 | EDU19912 strad | 60.5 | 9941.5 area |
| Local | B/S | 2,500 | EDU190/91 p spread | 3.5 | 9912 |
| Paper | S | 1,000 | EDM29850 strad | 102 | 9847 |
| New Edge | S | 500 | EDH29875 strads | 88.5 | 9870 |
| Paper | B | 5,000 | EDU91/92 pspreads | 0.5 | 9953/53.5 |
| Local | B/S | 1,250 | EDZ093/95/96 cfly | 3 | 9948.5 |
| Paper | B | 2,000 | EOZ78 puts | 3.5 | 9890.5 |
| Paper | S | 250 | EDZ190 strads | 73 | 9891 |
| Paper | B | 1,000 | EDH185/90 p1X2 2 legs over | 0.5 | 9941 |
| straddles: | |||||
| edQ0 9950 9/10 f=9953 | |||||
| edU0 9950 12.5/13.5 | |||||
| edV0 9950 14.5/15.5 shorts | |||||
| edZ0 9950 20/21 f=9948 EOQ 9912 14/15 | |||||
| edH1 9937 31.5/32 f=9941 EOU 9912 20/21 | |||||
| edM1 9925 44.5/45.5 f=9929 EOV 9887 29/30 | |||||
| EOZ 9887 40/41 | |||||
| reds EOH 9875 56.5/57.5 | |||||
| edU1 9912 60/61 f 9913 EOM 9850 74.5/75.5 | |||||
| edZ1 9900 72.5/73.5 f=9891 | |||||
| edH2 9875 88/89 f=9870 | |||||
| edM2 9850 101.5/102.5 f=9847 | |||||
| Paper | S | 5,000 | EDU95/96C1X2 | 3.75 | 9952 area |
| Paper | B | 500 | EDU0 95 strad | 13.5 | N/A |
| RBS | B | 2,000 | EDU096 calls | 2 | 9951.5 |
| Paper | B | 1,000 | EDU09950 strads | 14 | N/A |
| RJO | B | 4,000 | EOZQ90/92 strangles | 6 | 9913 |
| Paper | B | 500 | EDU2 82/85/87 c fly | 7.5 | N/A |
| Paper | S | 3,000 | EDU0 93/95/96 c fly | 4 | 9952.5 area |
| Citi | B | 5,000 | EDZ09925 puts | 7.5 | 9947 |
| Citi | B | 5,000 | EDH1 9912 puts | 10.5 | 9941 |
| Cube | B | 4,000 | EDQ 9962 calls | 1 | 9952/52.5 |
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