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Did Options Pin The Market?

15 May 2018 by lberuti

The credit market had many reasons today to feel a bit uneasy. The USD showed no sign of weakness. That meant emerging markets were under constant pressure across the board and, combined with the renewed tensions in the Middle East, led to some very bearish price action: the Lebanese Republic’s 5-year risk premium shot up another 50bps and reached 625bps, Turkey’s closed 24bps wider at 261bps. But in all fairness all CDX EM constituents were affected. The US interest rates kept creeping higher, and the 10Y not only traded back up above 3% but also breached the 3.05% level which was deemed to be the next level to watch. And indeed credit indices did drift a tad wider, but the move was really contained – iTraxx Main (ITXEB) widened 1bp and iTraxx Crossover 2bps -. The market felt really reticent to move any further ahead of the option expiry which takes place tomorrow. There is allegedly a big pin – ie a strike with an important option open interest - on the 55bps strike on ITXEB, and effectively sellers of protection were plenty as soon as it traded above that level.