There is a Rush by Options Traders to Bet as the Fed Will Not Cut Interest Rates

A bold, contrarian bet that the Federal Reserve will not lower interest rates this year is gaining major traction in the options market. This wager centers around a specific type of put option tied to the December 2025 futures contract for the Secured Overnight Financing Rate (SOFR), a key benchmark that closely follows the interest rate set by the Fed. Essentially, this put option gives its holder the right to sell the futures contract at a set price — in this case, 95.6875 — within a specified time frame.

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Currently, the futures market is pricing in roughly three quarter-point rate cuts by the end of the year, meaning the present futures price is higher than the strike price of this put option. For the option to increase in value, the futures price would need to decline toward the strike price, signaling that expectations for rate cuts are diminishing or disappearing altogether.

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Open interest — the number of active contracts held by traders — for this particular option has surged past 275,000. While this is still small compared to the contracts aligned with the market’s mainstream outlook, it has grown dramatically in recent weeks, especially after the latest Federal Reserve meeting. Since March, around $25 million has been funneled into buying approximately 250,000 of these contracts, according to traders familiar with the strategy and data compiled by Bloomberg.

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On Thursday, open interest in this strike price increased even further as SOFR futures prices declined, reflecting growing skepticism about whether the Fed will actually move to cut rates this year. Data from CME Group Inc., the exchange that offers SOFR futures and options, confirmed the uptick. The drop in futures prices was largely driven by renewed strength in the U.S. economy and robust stock market performance, which together have dampened the conviction that rate cuts are on the horizon.

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The position has gained considerable value since the Federal Reserve’s policy meeting this week, which concluded on Wednesday with a decision to hold the target federal funds rate steady at 4.25% to 4.5%.

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During a press conference following the meeting, Fed Chair Jerome Powell emphasized that current rate levels are appropriate given the economic backdrop and are unlikely to change until there are clear signs that conditions warrant an adjustment. Powell’s cautious stance sent a clear message that the Fed is not in a hurry to lower rates.

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The bet’s value got an additional boost on Thursday after U.S. President Donald Trump encouraged investors to buy stocks, citing progress on a potential trade agreement with the United Kingdom. This optimism fueled further gains in the U.S. stock market, strengthening the belief that the economy remains resilient — and making near-term rate cuts seem less urgent or likely.

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However, the landscape could shift again depending on the outcome of upcoming trade negotiations with China. On Friday, Trump floated the possibility of imposing an 80% tariff on Chinese imports, raising fresh concerns about the direction of U.S.-China trade talks. At the same time, sources familiar with the U.S. negotiating team’s preparations indicated that their immediate goal is to bring tariffs down below 60% as an initial step in the talks.

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The outcome of these high-stakes negotiations has the potential to significantly impact the Fed’s policy outlook for the rest of the year. If the talks lead to greater economic uncertainty or a slowdown in growth, the central bank could reconsider its current stance, increasing the odds of a rate cut. Such a shift would undercut the value of the contrarian put position in the options market.

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On the other hand, if the trade talks end in a way that reinforces economic strength or removes trade headwinds, the Fed could remain on hold or even adopt a more hawkish tone, potentially pushing the value of this bet even higher.

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Overall, this growing options market position highlights how some traders are positioning themselves against the broader consensus. While many in the market still expect the Fed to ease rates by year-end, this contrarian wager is thriving on the possibility that the central bank will stay put, banking on strong economic signals, robust corporate performance, and the belief that current conditions don’t warrant immediate monetary policy changes.

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Whether this gamble ultimately pays off will hinge on a delicate mix of economic data, central bank messaging, and the unpredictable outcomes of major geopolitical events like U.S.-China trade talks.

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