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Treasury "Strangler" Just Made A $10 Million Profit In Under 10 Days

On June 12, the rates market was fascinated with what was then described as an "unprecedented" vol trade: as Bloomberg described at the time, an unknown trader bought $10 million of out-of-the-money puts and calls on 10Y Treasury futs (i.e., a strangle) when the 10Y was yielding 2.38%, which was notable as it involved huge block sizes of about 63,500 on either side: "a strangle of that magnitude is rare, and possibly unprecedented" according to several rates traders who spoke to Bloomberg. The theta on the trade was so high that just to recoup the premium, the yield on the 10Y would have to rise or fall about 10 bps from 2.38%, and preferably very soon. Once the 10Y were to move beyond 10bps, gains are unlimited, and the trader "stands to gain about $50 million on a quarter-point move in either direction from the starting level, which would involve approaching this year’s highs and lows for 10-year yields."

Just as notable was the trade's short maturity, which expired on the July 21 settlement at 3pm, i.e. moments ago.

So where did the trade close? As Bloomberg's Edward Bolingbroke writes, "despite the latest dip from session highs after a $400k/DV01 TY block sale, the underlying September TY futures which closed around 126-10 level represent a profit of around $10m on the strangle."

With the premium on the August TY 124/126 strangle around $10m as of 2:45pm ET (15 min ahead of options expiry) the trade was worth around $20m, or a profit of $10 million.

So congratulations to the unknown trader, who doubled his risk in less than 10 days even without a material volatility event hitting the rates complex, although he was certainly lucky that unlike the EUR, the rates complex did not interpret yesterday's announcement by Mario Draghi as hawkish. It will also be interesting to see if his prompt success spawns various imitators eager to repeat his success.