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Option Expiry Pain

20 July 2016 by lberuti

Today was option expiry day on credit indices. July is not usually a particularly busy expiry, but this time it actually was. Some credit indices were flirting with levels corresponding to strikes with large amount of open interest. Such was the case of CDXIG526 and iTraxx Main (ITXEB525) which both traded close to 70bps and such was the case of iTraxx Financials Senior (ITXES525) which was trading around 95bps. While these levels proved sticky for most of the day, they also left dealers net buyers of protection once options expired at 4pm London time. An uptick in equity markets and a lack of conviction ahead of tomorrow’s ECB meeting was enough to convinced everybody that dumping the unwanted excess of protection was the right thing to do. This combined with a typically thin late session liquidity triggered a mini squeeze during the final hour that single names were unable to follow. Index bases finished the day deeper in negative territory.