How options traders are prepping for ‘higher for longer’ rates

investmentnews.com:

Options traders are seeking protection from higher interest rates ahead of Wednesday’s Federal Reserve policy decision. 

That’s a change from the norm over the past couple of weeks, during which traders broadly favored hedging for a pivot to rate cuts by mid-2024. The shift in momentum has a backdrop of erosion in the amount of easing priced in for next year and subscription to the idea that the Fed will raise rates once more this year in November or December and keep them elevated indefinitely. 

Wednesday’s policy announcement comes with updates to policy makers’ economic forecasts, including for the policy rate. That so-called dot plot is expected to show another rate hike by year-end. The recent break-out of the higher-for-longer theme is evident in futures linked to the Secured Overnight Financing Rate, where Friday saw record volumes in a spread trade linked to that narrative. 

Meanwhile, JPMorgan’s latest Treasury client survey released Tuesday shows investors net long positioning rising to the highest in a month. 

Here’s a rundown of positioning in various corners of the market:

This week has seen a couple of large hawkish trades in March 2024 SOFR options, with highlights including heavy demand for both SFRH4 94.375/94.125/93.875 put trees and SFRH4 94.25/93.875 1×2 put spreads. Open interest following Monday’s session suggested new risk via hawkish hedges, mostly spread across the start of next year. In SOFR futures, demand on Friday surged for Dec23/Mar24 steepeners, a trade that stands to benefit from higher-for-longer Fed rates. 

Fed-dated OIS markets have trimmed the amount of Fed rate cuts next year and beyond. Since Sept. 1 one 25bp hike, and then some, has been erased for period through the end of next