[Traders Hedge Fed Rate Cut Risks Through SOFR Options]
On December 4, the SOFR options market indicated that traders are focusing on various structural trades for the first two quarters of next year to hedge against the possibility of multiple Federal Reserve rate cuts or even a single 50-basis-point rate cut. The overnight index swap (OIS) tied to the Federal Reserve is currently pricing the effective rate for the June meeting next year at approximately 3.30%, about 60 basis points lower than the current effective rate. Recent trading themes involve buying bullish structures in January, March, and June SOFR options to hedge against rate cut premiums exceeding the current pricing in the swap market.