At least one trader in the options market is positioning for as much up 250 basis points of easing by the Federal Reserve next year.

The wagers, made using so-called SOFR options that reference the secured overnight financing rate, will start to pay off if the Fed cuts its benchmark rate to about 3% by September next year. The premium paid on the wager is around $13 million and Bloomberg options scenario analysis shows it could yield $200 million if SOFR falls as low as 2%.

While an outlier bet that few see coming to pass, the trade is evidence of the uptick in activity in SOFR derivatives, which closely align to expectations for future central-bank policy. While some earlier trades have since been closed out, traders are now pushing these wagers on a dovish pivot deeper into next year.

Traders Reload on Big Fed Rate Cut Bets, Target Multiple Easing

Hedge funds last week boosted net longs in SOFR futures to a fresh record high, according to the latest futures positioning data released by the Commodity Futures Trading Commission on Monday.

While appetite for the basis trade — in which hedge funds buy or sell futures versus cash instruments — may at least partly reflect some of the positioning, flows in SOFR futures on Monday included a huge 40,000 buyer of the December 2023 contract, a position that stands to benefit as traders price out almost all chance of a hike in December.

Additional rate hikes are certainly not on traders’ minds right now, and the consensus is for the Fed to cut — just not as much as 250 basis points. Swaps data shows investors are pricing in around 95 basis points of rate cuts from the January meeting into the end of next year.