Quick Takes: Swaption volumes by strike Q3 2024
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Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. I'm Ali Curi and every week, along with my guests, Chris Barnes and Mark Bell, we take a quick dive into the headlines on the Clarus blog.

Let's get started. Hi, Chris. Hi, Mark.

Chris Barnes: Hey Ali, Happy New Year. 

Mark Bell: Hey Ali, Happy New Year. 

Ali Curi: Happy New Year, gentlemen. Welcome back to Quick Takes.

I look forward to an exciting year for our podcast. Chris, let's kick off the year with you. What's your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss?

Chris Barnes: All right, this week we are back in Swaptions land. The blog is entitled "Swaption Volumes by Strike Q3 2024."

And so at the outset, I have to make it clear that we're talking about Q3 data here. You know, it takes a little bit of time to pull in the data on Swaptions. It's more due to my backlog of blogs I want to write, which is why we're talking about Q3 at the end of Q4. It's worth reminding ourselves that back in Q3, I look at where 10 year software swaps were, and I think they closed at about 3.5 or 3.6 percent. You know, so like a hundred basis points away from where we are now. It was a relatively volatile quarter. There was an 86 basis point range in 10 year SOFR swaps between 318 and 404. That's 30 basis point wider range than we saw for trading conditions in Q2. What that normally means is that lots of volatility tends to lead to lots of trading, tends to lead to a lot of swaptions activity as well. And it's really, really difficult, I've got to say, when you're writing these blogs to kind of dislocate what's happening in the markets now compared to, "You've got to look at the data, you've got to honor the data." You've got to take your mind out of market conditions now and move them back to what they were like in Q3.

And what I've found really, really valuable now is that I've done a series of these swaptions blogs, probably dating all the way back to 2022, or maybe even a couple in 2021.

And I didn't realize it at the time, but just that sheer act of looking at this swaptions data regularly has really built up some context on the blog now. And so what it enables us to do is say, look, not only this is the quarter as it was traded, this is the range of strikes, et cetera, but we now have a number of benchmarks to look at.

So how does that compare to the previous quarter? How does that compare to the previous year? If people are coming in and looking at this data for the first time, I think that's actually a really valuable insight, is that the first time that you do any piece of analysis on the SDR data, yes, it sheds some light on what has happened recently, but being able to put context on that and to be able to look at it compared to historic volumes is really, really valuable.

Again, from a Clarus perspective, I just want to really, really stress the data changed, back in 2021, so that straddles are no longer directly identified in the source data. We do identify straddles. We've updated the identification of straddles as well. And so what that enables the blog to do is look at heat maps of what is traded across a number of different strikes for both payers, receivers, and straddles.

Why am I mentioning straddles? Straddles make up 80 percent of trades in the dealer to dealer swaptions market. So let's say that they are really the standardized instrument that traders use to move vol around between them. Therefore, they're a really important market. Naturally, straddles have a much, much tighter concentration of strikes that they trade around.

They're mainly trading around the at the money strikes, they're mainly a dealer to dealer product. And it's really, really rewarding from a kind of removed observers perspective to be able to see just how much data there is there, and how actually fairly simple it is to create a structure to look at that data and to process what are the largest strikes traded this quarter compared to what are the largest strikes traded last quarter.

Also looking at the range of strikes. Has there been a lot more activity in high strikes, low strikes than let's say normal? It really does flesh out a whole story about the swaptions market. I think from kind of an overview of the blog, the swaptions blogs are always fairly meaty. So it's difficult to give you three or four main takeaways.

What I'd highlight is the Q3, '24 saw 9 percent fewer swaptions transacted than the same quarter in 2023. Even though we saw record volumes in underlyings of swaps and August was a pretty crazy month, right? And so volumes in swaptions were slightly down, potentially as a result of pre positioning for the election.

The biggest strike traded for the data was in payers. That's versus a one year underlying at a 4. 25 percent strike. Finally, 10 year, 3. 5 percent straddles. They saw over 43 billion in notional activity. That was the most activity of any single instrument of swaptions during the quarter. Mark, I've rattled through a number of different pieces there.

I don't know, there's probably like 50 bullet points in these blogs. Have you got any specific questions on the data I've presented? 

Mark Bell: Sure, Chris. I think, firstly, the Swaptions blogs are really one of my favorite blogs. Because it does show the power that you can get from the SDR data that we have. And it's probably one that we send to our potential clients the most, and one where our potential clients actually go, "Wow, you can really see this data."

First question is on the data itself. When you visualize the data, you bucketed all the expiries together. So a 1 year tenor and a 10 year tenor would be in the same group for the heat map purposes. Does the data allow you to drill in to see the actual data at an expiry level? And if so, are you able to sort of infer, for example, with short dated expiries on long dated swaps where the mortgaged books of banks may be hedged?

Chris Barnes: It's a really interesting question. Precisely, as you say, all of the expiries are grouped for the blog purposes. It is entirely possible to split them out. It's more a matter of how do you present that data? If we had an interactive chart, if we had a cube, we could present a whole host of different data.

I think what I'd stress for readers, is that this is meant almost as like a "Dummy's Guide for Swaptions." This is what I consider as high level as possible, to be able to pull out a story whilst making it a really accessible blog. I think there is huge scope in the data to take this analysis another step further, another step deeper and go exactly as you've said, what are the short-dated expiries doing? What is typical mortgage related activity? Can we follow those threads in the data? Entirely possible from a data perspective, it's more the limitations of your humble blogger here, rather than the limitations in the data. 

Mark Bell: So much data in the blog and yet there's additional dimensions that we could drill into.

The second question really is just from a non interest rate option trader, so myself, why are straddles so popular? 

Chris Barnes: When you trade an options book, what you're really trading is volatility, right? You've got a whole host of colleagues who are trading outrights already. The point of running an options book is to trade vol.

A straddle is a pure volatility trade. And so from a dealer to dealer perspective, you don't want to be entering into an outright payer or a receiver, which then you have to delta hedge as well. It's much, much better to just trade a pure volatility product. And so it's like the standardized unit of volatility that transfers between dealers.

Mark Bell: Thanks for that.

Chris Barnes: Pleasure. Ali, I think that's all we've got time for on Swaptions, sadly. 

Ali Curi: Thank you, Chris. And please, share with us again the title of your blog post. 

Chris Barnes: The title is not that catchy. I'm thinking I should come up with a new one for 2025. But the series has always been "Swaption Volumes by Strike," and this one was "Q3 2024."

Ali Curi: Great, that works. Chris Barnes, Mark Bell, thank you both for sharing your Quick Takes. Let's do it again next week. 

Chris Barnes: Look forward to it, Ali. Thank you very much. 

Mark Bell: Thanks, Ali. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn.

Thank you for joining us.