+80.16% Trading Interest Rates Higher

Overall net gain +80.16%, below I’ll explain how we’re doing it, what we’re trading and provide links to monitor these trades moving forward, for confirmation of trade entry dates see the Seeking Alpha financial website.

Trade 1  +59.93%, trade entry date 1 September 2016
Trade 2  +112.50%, entry 22 August 2016
Trade 3 +81.00%,  entry 29 August 2016
Trade 4 +86.29%, entry 21 September 2016
Register here if you like to learn more about trading interest rates higher

Latest Fed guidance for rates 14 December 2016

Date Fed Funds 3 Month Deposits
Current Rates
0.50%-0.75% 1.00%-1.25%
Dec-17 1.40% 1.90%
Dec-18 2.10% 2.60%
Dec-19 2.90% 3.40%

I believe the economy is looking far better than September 2014 and the Fed will revise its outlook for rate hikes higher over the next 6-36 months to be more in line with their September 2014 guidance.

Fed guidance for rates September 2014

Date Fed Funds 3 Month Deposits
Current Rates
0.50%-0.75% 1.00%-1.25%
Dec-17 2.50% 3.00%
Dec-18 3.50% 4.00%

Performance and position update

Trade 1+59.93%

A) Entry date 1 September 2016
Position: Short December 2019 delivery (GEZ19)
Entry price: 98.6150
Market’s anticipated 3 month rate by December 2019 = 1.3850%
Position value  $3,462.50
Exchange margin requirement  $510
I’ve allocated $3,462.50 to avoid any margin issues.
Each 0.01 move = $25.00 per contract
Original trade entry posted on Seeking Alpha 5 September 2016
What the 3 month rate contact is and where it’s traded
3 month interest rate futures contract specifications

B) 13 January 2017
Current GEZ19 contract price 97.7850
Market’s current anticipated rate by December 2019 = 2.2150%
Open Trade Equity +$2,075.00,
Allocation valuation has appreciated to $5,537.50,+59.93%

Objective

C) Using the latest Fed guidance for where the Fed sees rates by December 2019 Fed Funds should increase to 2.90%, 3 month deposit rates to 3.40%. The 3 month December 2019 contract price should fall to 96.60 (100.00 – 3.40 = 96.60), trade entry position value of $3,462.50 should increase to $8,500. Using Fed guidance from September 2014 of 4.25% the contract price would fall to 95.75 with the position value increasing to $10,625.00.

Current chart to monitor this trade forward. We’re looking for the price of the contract to fall from 97.7850 to 96.60 or lower between now and December 2019 as 3 month deposit rates rise, each 0.01  $25.00

Trade 2+112.50%

A)Trade entry date 22 August 2016
Long March 2017 (GEH17) 98.9250
Short December 2018 (GEZ18) 98.8200
We’re anticipating the GEH17 GEZ18 spread to increase from 0.1050
Position value  $262.50
I’ve allocated $1,500.00 to avoid margin issues and have the option to add positions should the spread price decrease.
Each 0.01 change  $25.00
Exchange margin requirement  $470
Original trade entry posted on Seeking Alpha 5 September 2016

B)13 January 2017
Long March 2017 (GEH17) current price 98.9250
Short December 2018 (GEZ18) current price 98.0550
Current Spread  0.8750
Position value  $2,175
Open trade equity  $1,912.50
Less all hedge and commission costs  -$225.00
Net gain = $1,687.50
Current $1,500 allocation valuation  $3,187.50,+112.50%

Objective

C) If I am correct and the Fed revises their rate expectations to be more in line with their September 2014 guidance this spread will widen to 1.4250 increasing the position value to $3,562.50 generating an overall increase in the $1,500 allocation valuation to $4,800.00.

Current chart to monitor this trade forward, we’re looking for the spread to increase as the December 2018 (GEZ18) contact price falls to reflect the increase in 3 month deposit rates, each 0.01  $25.00

Trade 3+81.00%

A)Trade entry date 29 August 2016
Long March 2017 (GEH17) 98.9250
Short December 2020 (GEZ20) 98.5050
We’re anticipating the GEH17 GEZ20 spread to increase from 0.4200
Position value $1,050
I’ve allocated $2,500.00 to avoid margin issues and have the option to add positions should the spread price decrease.
Each 0.01 change $25.00
Exchange margin requirement  $525
Original trade entry posted on Seeking Alpha 5 September 2016

B)13 January 2017
Long March 2017 (GEH17) current price 98.9250
Short December 2020 (GEZ20) current price 97.6050
Current Spread  1.3200
Position value  $3,300.00
Open trade equity  $2,250.00
Less all hedge and commission costs = $225.00
Net gain = $2,025.00
Current allocation valuation  $4,525.00,+81.00%

Objective

C) If I am correct and the Fed revises their rate expectations to be more in line with their September 2014 guidance this spread will widen to 2.6750 for an increase in position value to $6,687.50 generating an overall increase in the $2,500 allocation valuation to $8,137.50.

Current Chart, to monitor this trade forward, we’re looking for the spread to increase as the December 2020 (GEZ20) contact falls in price to reflect the increase in 3 month deposit rates, each 0.01  $25.00

Trade 4 +86.29%

A) Entry date: 21 September 2016
Position: Short December 2018 Fed Funds (ZQZ18)
Entry price: 99.1650
Market’s anticipated Fed Funds rate by December 2018 = 0.8350%
Position value = $3,480.00
Exchange margin requirement = $710
I’ve allocated $3,500 to avoid any margin issues
Each 0.01 move = $41.67 per contract
What the Fed Funds rate is and how it’s set
Fed Funds contract Specifications
Original trade entry posted on Seeking Alpha 21 September 2016

B) 13 January 2017
Current ZQZ18 contract price 98.44
Market’s current anticipated rate by December 2018 = 1.56%
Open Trade Equity = +$3,020.00
Position value = $6,500.00, +86.29%

Objective

C) Using the latest Fed guidance for where the Fed sees rates by December 2018 the Fed Funds rate should increase to 2.10%. The December 2018 contract price would fall to 97.90 (100.00 – 2.10 = 97.90), position value would increase to $8,750.00. Using Fed guidance from September 2014 of 3.50% the contract price would fall to 96.50 with the position value increasing to $14,583.33.

 Current chart to monitor this trade moving forward. We’re expecting the Fed funds (ZQZ18) contract price to fall to 97.90 or lower between now and December 2018 as the Fed Funds rate rises.

Register here if you like to learn more about trading interest rates higher

Reports on deck

  • Extreme fundamentals that will impact all of our portfolios
  • Defined risk trading strategies for capturing major moves
  • Hedging a hemorrhage and/or capturing the move lower in stocks
  • US economic reports fact or fiction
  • Trading the coming trade wars
  • Capturing the inevitable major market moves in the U.S. dollar
  • Trading gold using automated trading strategies
  • Generating income writing credit spreads in energy markets
  • Understanding changes in implied volatility
  • The risks and rewards of trading vertical credit spreads, short butterflies, short condors, ratio call back spreads and ratio put back spreads as implied volatility spikes before earnings announcements.

Contact us with your questions and we’ll provide you the answers, an objective opinion and links for additional information and/or verification.

Regards,
Peter Knight Advisor
Asset Investment Management


Disclosure

Published by

Asset Investment Management

Family Office, Advisors

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.