(Bloomberg) -- The derivatives market that aims to supplant U.S.-dollar-Libor-settled eurodollar futures and options has taken another stride forward in the past week with the emergence of a sizable volatility trade.

The position appeared in June 2023 options linked to 3-month futures referencing the Secured Overnight Financing Rate. Over the course of Friday and Monday, almost $100 million has been spent on a long volatility structure called a straddle, involving the purchase of calls and puts with the same strike. The position grew to 40,000 contracts Monday, after open-interest data revealed Friday’s activity as setting new risk. 

According to CME Group Inc., which lists the derivatives, last week saw a record number of SOFR options trade, matched by a record amount of open interest. The transition to futures and options linked to SOFR is occurring at a critical time in the economic cycle. At one point Thursday, swaps tied to Federal Reserve meeting dates fully priced in a rare 50-basis-point rate increase in March.    

The recent rise in SOFR options activity follows growing demand for the underlying futures, where volume recently has been consistently around 30% of eurodollar futures volume. 

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