Traders bet against the European Central Bank's interest rate cut with €2 million options for a €25 million return
Traders are betting on a rate cut by the European Central Bank through options strategies, with a potential return of €25 million if the policy is implemented, at a cost of only €2 million. The market estimates the probability of a 25 basis point rate cut by the end of the year to be around 50%. Despite a cooling of rate cut expectations, traders are still trying to capture potential policy benefits
According to Zhitong Finance APP, traders are positioning themselves through options strategies in anticipation of an interest rate cut by the European Central Bank (ECB), which could yield substantial returns if the policy materializes in the coming months. This week, there have been several large bets related to options linked to the three-month Euro Interbank Offered Rate (Euribor). These derivatives give buyers the right to buy or sell the underlying asset at a predetermined price, but without the obligation to execute.
Specific operations indicate that if the ECB lowers the benchmark interest rate from the current 2% to 1.5% before December and maintains it until March next year, the related investments could generate over €25 million (approximately $28.5 million) in returns, with costs of only about €2 million. Even if the deposit rate is only reduced by 50 basis points by early 2026, this strategy could still be profitable.
It is worth noting that ECB President Christine Lagarde previously stated that after cumulatively lowering the deposit rate by 200 basis points to 2% within a year, policymakers might enter a wait-and-see period. However, the market still retains about a 50% probability of a further 25 basis point rate cut before the end of the year, providing some room for speculation in the current bets.
The monetary market's expectations for the interest rate path exhibit volatility. Two months ago, when expectations for U.S. tariffs increased, the market predicted that the interest rate would reach 1.5% by the end of the year. However, recent slight rebounds in inflation indicators in parts of France and Germany have shifted the focus back to price stability.
A Bloomberg survey shows that 20% of economists expect the benchmark interest rate to drop to 1.5% by the end of 2025, while the remaining analysts are almost evenly split between "maintaining at 2%" and "a further cut of 25 basis points to 1.75%." This divergence reflects that, although expectations for rate cuts have cooled, traders are still attempting to capture potential policy benefits through options structures
