Left Tail Trade Idea- SOFR
A must have insurance
I’m looking to establish a position in a SOFR out-of-the-money call option, not because my base case is emergency cuts, but because the payoff is radically asymmetric if the Fed gets forced into a messy, credibility-testing easing cycle to defend its mandate.
What’s the driver… this… a the very thought provoking Citrini article yesterday.
The best way I’ve found to frame why this tail is worth owning (in modest size) is the scenario above from Citrini Research. It’s explicitly a scenario, not a prediction, but it does a good job mapping how an AI-driven shock could hit both sides of the mandate labor first, then disinflation/deflation dynamics as demand and velocity roll over.
A few lines that jumped out to me (quoted and attributed):
“The unemployment rate printed 10.2% this morning…” — CitriniResearch
“The velocity of money flatlined.” — CitriniResearch
“It was a negative feedback loop with no natural brake.” — CitriniResearch
“Lack of a comprehensive plan is now threatening to accelerate a deflationary spiral.” — CitriniResearch
“The bond market… began pricing the consumption hit… the 10-year yield began a descent…” — CitriniResearch
“You can cut rates to zero and buy every MBS… It won’t change the fact that…” — CitriniResearch
That last quote is the key rates lens for me, even if policy can’t solve the real-economy engine of the shock, it can absolutely fight the second-order financial tightening that tends to emerge when labor breaks, credit spreads gap, and liquidity preference spikes.
