SR3Z6 SOFR futures options · bull call spread · written 23 October 2026 · paper trade
Trade Memo · RatesPaper trade · not investment advice
The Market Is Too Sure the Fed Hikes in December
Futures price roughly a 90% chance that the Fed raises rates again on 9 December. I think a pause is far more likely than 1-in-10: jobs growth has stalled, housing is weakening, and much of the inflation jump is an energy shock the Fed can't fix with higher rates. I express that view with a small, capped-risk bet that pays if the Fed holds.
Trade ticket
Instrument
Options on December 2026 Three-Month SOFR futures (SR3Z6), expiring 11 Dec 2026
Structure
Buy 95.875 call, sell 96.00 call (a 12.5 basis point bull call spread)
Entry
Pay no more than 3.0 bp ($75) per spread
Size
10 spreads → maximum loss $750
Maximum gain
9.5 bp per spread → $2,375 on 10 spreads (about 3.2× the risk)
Wins if
The Fed holds on 9 December
Break-even odds
A hold needs at least a 24% chance; the market says ~10%, I say ~30%
Market odds of a hold
~10%
CME FedWatch, 22 Oct
My odds of a hold
~30%
see "My View"
Risk : reward
1 : 3.2
at a 3 bp entry
Expected value
+$188
10 spreads, if I'm right on odds
The idea in one line
I'm not betting that a hold is likely. I'm betting it's more likely than the price says. When something is priced at 10% but you think it's 30%, a cheap bet on it can be worth making, even though you'll usually lose it.
Section 1The starting point
What the Market Thinks
Before having a view, you need to know what's already in the price. Right now, the market is close to certain the Fed hikes in December.
The see-saw: price = 100 − rate
A SOFR future is quoted as 100 minus the interest rate people expect over a three-month window. If traders expect 4.18%, the future trades at 95.82. Rate and price move like two ends of a see-saw: if expected rates fall, the price rises. One basis point (0.01%) is worth $25 per contract.
Futures price = 100 − expected average SOFR
Snapshot — 22–23 October 2026
Measure
Level
What it tells us
Fed target range
3.75–4.00%
After a unanimous hike on 16 September, the first in three years
SOFR (overnight)
3.88%
Where overnight borrowing actually sits (21 Oct)
SR3Z6 future
≈ 95.82
Market expects SOFR to average ≈4.18% from mid-Dec to mid-Mar
October hike odds
≈ 16%
A pause next week is expected
December hike odds
≈ 90%
A December hike is treated as almost certain
Reading the price
Overnight SOFR is 3.88% but the December future implies 4.18%. That extra ≈30 bp is the market saying: one more 25 bp hike in December, plus a little chance of more early next year. If the Fed holds instead, that expected rate has to fall, and the future has to rise.
Section 2Why I disagree
Why a Pause Is Underpriced
My case rests on data, not on guessing what any politician wants. Here's the evidence for a hold, and the evidence against me, side by side.
1
Jobs growth has stalled
September payrolls rose by just 29,000, far below forecasts, and unemployment rose to 4.2%. Hiking into a weakening jobs market risks tipping it over.
2
The inflation jump is mostly energy
Headline CPI hit 3.7%, but gasoline (+34% year on year) did much of the work. Core CPI is 2.6%. Higher rates can't produce more oil, and central banks often look through supply shocks like this.
3
Housing is already cracking
September housing starts fell and pending home sales dropped to a record low. The rate-sensitive parts of the economy are already slowing.
4
The Fed hasn't committed
Chair Kevin Warsh declined to say when, or whether, further hikes would come, and senior officials have sounded more cautious since September. A 90% price leaves no room for that doubt.
The case against me
Argument for a hike
My response
September minutes said another hike would likely be appropriate by year-end
That was before the weak jobs and housing data. The minutes also said decisions depend on incoming data.
Headline inflation is rising, not falling (3.4% → 3.7%)
True, and it's the biggest risk to this trade. But it's energy-led, and core rose only modestly.
Other central banks are hiking (the ECB raised rates)
Each bank sets policy for its own economy; US jobs data is weaker.
The economy has otherwise been strong
Yes, which is why I put a hold at ~30%, not 50%+. I'm arguing it's underpriced, not that it's the most likely outcome.
Background, not a reason
The US midterm elections on 3 November add political noise around rates. I don't rely on it: the Fed is independent, and the December meeting comes a month after the vote. If anything, the Fed will want any decision to look purely data-driven.
Section 3Structure · strikes · payoff
Turning the View Into a Trade
I want something that pays well if the Fed holds, costs little if I'm wrong, and can't lose more than I put in. A bull call spread on the December SOFR future does all three.
Why SR3Z6, and why these dates line up
SR3Z6's options expire on 11 December, just two days after the Fed's decision on 9 December, so the result is fully in the price before my options settle. The future itself prices the average rate from 16 December to mid-March, a window that includes the next (late-January) meeting. So a hold only helps fully if the market doesn't immediately price a January hike instead.
Why these strikes
I worked out where the future should trade on 11 December under five outcomes, by averaging the expected overnight rate across the 91-day window. The 95.875 / 96.00 strikes sit neatly between the "hike" and "hold" clusters.
Outcome on 9 Dec
Expected avg rate
SR3Z6 price
Spread pays
Hike, more hikes signalled
4.21%
95.79
0 bp
Hike, "last one" tone
4.13%
95.87
0 bp
Hold, January hike fully priced
4.01%
95.99
11.3 bp
Hold, hikes on pause
3.92%
96.08
12.5 bp (max)
Surprise cut
3.63%
96.37
12.5 bp (max)
The design choice
Even in the least helpful hold case — the Fed pauses but everyone expects a January hike — the spread still pays 11.3 of a possible 12.5 bp. That's deliberate: the trade should reward being right about December without needing me to also be right about January.
Profit or Loss at Expiry — 10 Spreads, 3 bp Entry
SR3Z6 on 11 Dec95.820
Implied rate
–
Spread pays
–
Profit / loss
–
Is it worth it? Expected value
I'll lose this bet most of the time, so the question isn't "will it win?" but "does it pay enough when it wins?" Move the sliders: the trade only makes sense if your odds of a hold are above the break-even line.
Expected Value per 10 Spreads
My hold odds30%
Entry cost3.00 bp
Break-even odds
–
EV at my odds
–
EV at market odds (10%)
–
The arithmetic
Max gain = 12.5 − 3.0 = 9.5 bp Max loss = 3.0 bp
Break-even = cost ÷ width = 3.0 ÷ 12.5 = 24%
EV (30%) = 0.30 × 9.5 − 0.70 × 3.0 = +0.75 bp = +$18.75 per spread
EV (10%) = 0.10 × 9.5 − 0.90 × 3.0 = −1.75 bp = −$43.75 per spread
If the market's 10% is right, this is a losing trade. Its value comes entirely from my disagreement with the market — which is why the next section matters.
Section 4What could go wrong
Risks, Catalysts and the Plan
A trade is only as good as the plan for managing it. Here's what I'm watching, what would prove me wrong, and what I'll do.
Dates that will move this trade
27–28 Oct
October FOMC
Pause expected. The statement and press conference tone set up December.
29 Oct
September PCE
The Fed's preferred inflation gauge.
November
Jobs & CPI
October payrolls and inflation — the biggest swing factors.
9 → 11 Dec
Decision & expiry
Fed decides; options settle two days later.
Main risks
Risk
Why it matters
Energy shock spreads
If higher oil starts lifting core inflation, the Fed hikes and the spread expires worthless.
Jobs rebound
A strong October payrolls number would undo my strongest argument.
Hold, but hawkish
A pause paired with a clear "January hike" signal reduces the payout (to ~11 bp in my model, more if the market prices extra hikes).
Execution cost
Options have bid-ask spreads. If the spread can't be bought at 3 bp or less, the maths no longer works and I don't trade.
Year-end funding
SOFR often jumps briefly around 31 December; small for a 91-day average, but it nudges the expected rate up.
Rules
→
Entry
Buy 10 spreads only at 3.0 bp or less. No chasing a higher price.
↑
Take profit
If dovish data lifts the spread to ≥ 9 bp before the meeting, sell half and keep the rest for the decision.
!
What changes my mind
October payrolls above ~150k, or core CPI clearly accelerating, or Fed officials openly endorsing a December hike. Then I close and accept the loss.
□
Never
Add to the position if it moves against me. The $750 maximum loss is the whole risk budget.
After 11 December
I'll publish a follow-up breaking down what happened: how much of the result came from the Fed decision, from changes in expectations for January, and from time decay. Whatever the result, the point is to compare my reasoning with what actually happened.
Section 5How I got the numbers
Method, Limits and Sources
Scenario prices
The future settles on the average SOFR over 16 Dec 2026 – 17 Mar 2027 (91 days). For each outcome, I take SOFR's current position in the Fed's range (3.88%), shift it by the December decision, and add any January hike in proportion to how much of the window comes after a late-January meeting (about 48 of 91 days):
def sr3z6_price(sofr_after_dec, p_jan_hike):
avg_rate = sofr_after_dec + 0.25 * p_jan_hike * 48 / 91
return 100 - avg_rate
# e.g. hold, January hike fully priced:
sr3z6_price(3.88, 1.0) # -> 95.988 -> spread pays 11.3 bp
Why I set an entry limit instead of a model price
A standard bell-curve options model (Bachelier, with an assumed 50–90 bp yearly volatility) values this spread at 3.3–4.5 bp. Weighting my scenario payoffs by the market's own 90/10 odds gives about 1.3 bp. They disagree because a Fed meeting doesn't produce one smooth range of outcomes: it produces two clusters, "hike" and "hold". So I don't trust either number. I set a limit of 3 bp, where the trade still works at my odds, and check a live quote before trading.
Limits of this memo
Prices are snapshots from 22–23 October 2026 and will move. The late-January meeting date is an assumption. Option premiums are estimates, not live quotes. This is a paper trade written for learning.
Sources
FXStreet, 22 Oct 2026 — CME FedWatch: 84% October hold, 90% December hike; Warsh guidance; housing data