Close your positions before the Fed decision! Some people have made tens of millions of dollars betting on the Fed's difficulty in cutting interest rates…

How do geopolitical conflicts indirectly contribute to millions of dollars in options profits?

Cailian Press, March 17 (Editor: Xiaoxiang) Since the beginning of this month, the surge in oil prices and the market’s significant cooling on expectations of the Federal Reserve’s easing policy have resulted in a $10 million profit from a short-term interest rate options bet.

This trade was initiated in January on options linked to the Secured Overnight Financing Rate (SOFR), which is closely related to the Fed’s policy path. The latest open interest data released by CME on Monday (covering last Friday’s trading) shows that the sell-off of related options at the weekend aligns with the profit-taking from this position.

Most of these options trades are anonymous, making it difficult to identify the involved institutions and the specific beneficiaries of the bet. However, the success of this wager has still been widely discussed within the industry.

Trading data indicates that this position was established long before the recent Middle East conflict erupted, with the goal of betting that the Federal Reserve’s interest rate in mid-2028 would be higher than the market’s main expectations in January.

As geopolitical conflicts pushed oil prices to their highest levels since 2022, triggering inflation concerns and leading traders to expect the Fed to maintain high interest rates for a longer period, this position turned profitable last week.

The shift in interest rate expectations benefited this bet because the subsequent sell-off in SOFR futures drove up the prices of related put options—put options give holders the right, but not the obligation, to sell the underlying asset at the strike price.

Currently, traders in the futures market only expect the Fed to cut interest rates by about 25 basis points before the end of this year, whereas market pricing at the end of February had anticipated at least two 25-basis-point rate cuts.

Additionally, traders have priced in higher long-term interest rates—SOFR futures for June 2028 are now about 30 basis points higher than levels seen in early March.

The profit-taking on these options positions comes just before the Federal Reserve’s decision this Wednesday. The market widely expects the Fed to keep rates unchanged this week. However, given the turbulence in international affairs, the significance of this Fed decision will be self-evident.

Traders will closely watch Fed Chair Powell’s press conference for the latest views on soaring energy prices and how to balance the economy amid signs of a softening labor market. This quarterly rate decision will also release the highly anticipated dot plot, which is expected to provide key clues about the Fed’s interest rate trajectory in the coming years.

(Cailian Press, Xiaoxiang)