Rising oil prices altered expectations of interest rate cuts, resulting in a $10 million profit from a single Federal Reserve options bet.

The sharp rise in oil prices this month, coupled with a downward revision of market expectations for further easing by the Federal Reserve, resulted in a $10 million profit on an options trade targeting short-term interest rates. This bet, placed in January in the form of options linked to the overnight funding rate, which is closely correlated with the Fed's policy direction, was reflected in the CME Group's positioning data released Monday, covering Friday's trading. The data showed that selling of the options at the end of last week matched the profit-taking on the position. This bet, which existed even before the outbreak of war in the Middle East, indicated that the Fed's interest rates would be higher by mid-2028 than the consensus expectations in January. The bet turned profitable last week as the conflict caused oil prices to rise to their highest level since 2022, raising concerns about inflation and prompting traders to expect the Fed to maintain higher interest rates for a longer period. (Jinshi)