Report highlights

Rich Excell explores the flexibility of Wednesday Weekly options and how the contracts can give traders ways to optimize their reward to risk trades amid increased volatility in the 10-year yield.

Image 1: 10-Year U.S. Treasury Yield Relative to the Federal Funds Discount Rate

Ten-Year U.S. Treasury yields are a powerful tool in any investor’s toolkit. This one yield can signal so much because it digests a range of information and in turn, influences every asset class there is. Some may hold the theory that the 10-year yield is essentially the accumulation of expected short-term yields over the next 10 years. Looking at an overlay of U.S. 10-year yields and the Federal Funds discount rate, one can see the link where the market begins to anticipate changes in the Fed Funds rate and moves before the Federal Reserve actually changes short-term rates. With so many discussions about when and how much the Fed will ultimately cut (or hike), there has been a bit more volatility in the 10-year yield this year.

Image 2: ISM Purchasing Managers Survey vs. ISM New Orders to Inventory ratio vs. 10-Year Note futures

Headlines were focused on the move lower in Treasury note yields given the lower-than-expected ISM Purchasing Manager Survey. Not only was the market worried about growth slowing much more than expected, but it was also focused on the new orders to inventory ratio, which has leading properties with the index itself. Comparing each to the 10-Year Note futures, one may see that this index has some leading properties with yields. I show this by inverting the price of the generic front-month Treasury Note futures. This slowing ISM data may be suggesting lower yields and higher prices in the futures if past patterns hold.

Image 3: Generic front-month Treasury Note Futures vs. Job Opening and Labor Turnover Survey

However, if the market is focused on future Fed policy, it may care more about jobs and inflation, since these are the two pillars of the Fed mandate. While many in the market will focus on non-farm payrolls, its predictive power for bond yields and prices got a bit noisy with the data around Covid-19. As such, some have turned to focus on the Job Opening and Labor Turnover Survey or JOLTS. This measure tells us about the health of the labor market as measured by the number of jobs available. In this chart, I have inverted the JOLTS data and overlaid it with Treasury futures. With the continued weakness of this data, one might think there could be upside in the futures from here.

Image 4: Consumer price index vs. personal consumption expenditures vs. generic front-month Treasury futures

As I’ve said before, the Fed has a dual mandate. Of this dual mandate, one can argue that bond investors will worry more about inflation than growth, since inflation erodes away the value of future coupon payments and principal repayment. When we look at Treasury futures and compare them to either CPI (market/media preferred) or the PCE (Fed preferred) measures, we can see that inflation level has fallen (these indices are inverted on this graph). Again, this may point to potential upside in futures should this trend continue.

Image 5: Economic calendar for Wednesday June 12, 2024

Within QuikStrike, there is a Dashboard button, which is the first place I go every time I open the tool. One can filter the news to look at as many or as few countries as they need. One can also get all events occurring on each day or only the high impact. You can look at one particular day or every event for the next month. June 12 is an important day on the calendar for the market as we can see that we will get the most recent inflation data as well as get news from the Federal Reserve after their one-day meeting. This day has been highlighted on traders' calendars since the start of the year, but particularly after the last FOMC meeting. With the new CME Group Wednesday options, a trader can target owning options for this particular event day for maximum potential impact.

Image 6: Implied volatility term structure for Treasury Yield options

The next stop for me is to look at the term structure of implied volatility. From this I can get a sense for how much June 12 stands out in the pricing of risk going forward. You can immediately see that the implied volatility of 8.5% stands well above the rest of the volatility curve, which tends to range from 6.5-7%. While other dates further out will still capture this news, the most direct impact will be on the Wednesday and Friday options that expire this week (June 12 and June 14). A trader may ask whether or not the 8.5% number is fair, cheap or expensive. A quick calculation of the realized or historical volatility on a rolling 10-, 30- and 60-day basis to be in the 5.5-6.7% range. This is likely why the curve settles into this type of range. However, does that mean 8.5% is too high? It captures the event without any other dilution. Does this mean it is cheap? How can a trader decide?

Image 7: CME Group Event Calculator for Treasury Yield options

Fortunately for traders, CME Group has an event volatility calculator that helps to determine this calculation. From their website at, “The term structure of volatility for a specific product is the market consensus estimate of future realized volatility for each given option expiration period. Variations in this term structure can imply moves in the underlying futures contract being priced in due to an upcoming event.” Using the at-the-money implied volatilities for the days before and after any event (you can choose the day you want to analyze in the upper left), the calculator will return “the implied one-day move up or down in the futures price based on the respective term and forward volatilities for the given event.” One can see 8.4% implied volatility for June 12 is well above the days around it. Using that incremental information, the expected one-day move in the Treasury Yield futures is calculated to be 13.5% as shown in the table and in the upper left. This is at the highest end of the range for the realized volatility we have witnessed in the Treasury Yield futures this year.

Image 8: Expected return and Greeks for short WY2M4 110 straddles, protected by a 110.75 call purchase

Using all of that information, a trader may decide the implied volatility for this event is too high and want to express that volatility view by selling a straddle for the June 12 event. However, as we saw in earlier charts that overlaid measures like ISM, JOLTS and CPI against the Treasury Yield contract, if there is a big move, it might well be to the upside. Thus, the trader may want to take some of this premium and invest in purchasing upside calls to protect against losses on a move in that direction. Using the QuikStrike spreadbuilder tool, I can analyze the breakevens for a short WY2M4 110 straddle (June 12 expiration) hedged with a purchase of the same expiration 110.75 calls. You can see the resulting payout where the breakeven on the downside is 109.05 vs. the 110.07 futures. The maximum payout of 0.533 is achieved if futures settle at the 110 strike. On the upside, while P&L moves away from the maximum, it never moves below breakeven, leaving a small profit but at least a marginal gain on a bigger move higher. Hedging only one tail enables a trader to make (or at least not lose) in more than one scenario, so they can focus on the risk, which would come only from a large move lower in the futures. 

The flexibility of having Wednesday options, particularly when those options line up with key events on the calendar, gives traders ways to optimize their reward to risk trades. With the tools from both CME Group and QuikStrike, such as the Economic Calendar and Event Volatility Calculator, a trader can more easily get the information needed to make their long or short decisions. The combination of the options expirations and the tools a trader can use to evaluate those options creates a powerful potential experience for trading. 

Good luck trading!

The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by [Data Resource Technology]. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.


CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

© 2024 CME Group Inc. All rights reserved.