Chart duration January 2011 through December 2018.
Each 0.01 change = $250.00.
This market can be traded just as easily short as long.
1 position = 10 contracts long & 10 short, margin per position has never exceeded $3,800.00 USD since January 2011,
Recommended deposit per position $10,000 or major equivalent
2) Position valuation is calculated from zero anticipated rate hikes,
Positive = a priced in rate increase between two delivery months
Negative = a priced in rate decrease between delivery months
3) Basics of how were trading this
13 September 2013 the market was trading at 0.4800, translated the market had priced an increase in rates between March 2019 to December 2020 of +0.4800%.
The short-term moving average (red line) and medium-term exponential moving average (green) moved above the long term average (blue) additional indicators we use confirmed the trend reversal from down to up. All indicators are fully disclosed to clients.
0.4800 long entry
Position value = $12,000.00
Each 0.01= $250.00
Margin = $3,800.00,
4) 18th of December 2013
The short-term moving average (red line) and medium-term (green) moved below the long-term (blue) additional indicators confirmed the trend reversal from to up to down.
To reverse the position from long to short we’d
The first 10 of 20 spreads offsets the 0.4800 long
Entry 0.4800 long, position value = $12,000.00
Offset at 0.6600, position value = $16,500.00
Gross profit = $4,500.00.
The second 10 of the 20 spreads creates the net new short.
New position short at 0.6600
5) 30 January 2014
The short-term moving average (red line) and medium-term (green) moved above the long term (blue), additional indicators confirmed the trend reversal from down to up.
The first 10 of 20 contracts offsets the 0.6600 short
Entry 0.6600 long, position value = $16,500.00
Offset at 0.6050, position value = $15,125.00
Gross profit = $1,375.00.
Margin = $3,800.00,
The second 10 of 20 creates the net new long.
New position, long at 0.6050%
6) Now let’s review a short position using current data where rate expectations moved from +0.3050 on 13th of November 2018 to -0.0100 by the 6th of December 2018, value of this move = $7,875.00, margin $3,800.00 recommended deposit pr position $10,000.00.
13th of November 2018
The market was trading at +0.3050, position value = $7,625.00
The short-term moving average (red line) and medium-term (green) moved below the long term (blue), additional indicators we use confirmed the trend reversal from up to down
To establish a position consistent with the trend you would go short expecting the price to decrease.
On the 13th of November 2018 we enter a short at 0.3050
Short 10 March 2019 (GEH19)
Long 10 December 2020 (GEZ20)
Premium to the March 2019 = + 0.3050
Position value at 0.3050 = $7,625.00
Margin = $3,800.00,
We want the price to decrease
7) 6th of December 2018
We were still short at 0.3050 the markets settled at -0.01 indicating the 15 trillion USD in the face value of open positions was pricing in a rate decrease between March 2019 and December 2020 of -0.01%.
Short Entry = 0.3050%,
Position value = $7,625.00 (13th of November 2018)
Current = – 0.01,
Position value = -$1,250.00 (6th of December 2018)
Each 0.01 = $250.00
Open trade equity = +$7,875.00
8) Calculating Rate Expectations Between Delivery Months
Take the nearby delivery and subtract the forward,
Take March 2019 97.205 and subtract December 2020 97.215 = -0.01% The market is telling us to expect a decrease in rates between March 2019 and December 2020 of 1.00%.
Delivery months currently trade out to September 2028,
This market and it’s 15+ trillion in the face value of open positions will give you a far more accurate read on rate expectations to the 0.01 through September 2028 than any analyst.
To calculate the priced in rate exceptions between March 2019 and December 2023 you would take March 2019 97.215 and subtract December 2023 97.10 = +0.105% telling us the market has priced in a slight increase in rates between March 2019 and December 2020.
9) The Instrument we’re trading
3 month rates or Eurodollar deposits, are time deposits denominated in U.S. dollars at banks outside the United States. (There is no connection with the euro currency or the Eurozone).
Eurodollar futures contacts reflect what the market believes 3 months rates will be during the contract delivery month,
The price of the March 2019, 97.140, it’s telling us the market believes that 3 month rates will be at 2.860% during the month of March 2019.
To calculate the rate the contact price represents
– 97.1400 contract price
= 2.860% the rate a contract price of 97.1400 represents
10) The type of trade we using to capture these moves is called a spread.
11) Choosing a Spread Strategy
A Steepening curve (increase in price between two deliveries) when the market anticipates interest rates will rise faster in the forward deliveries than the nearby deliveries, example, nearby would be March 2019 forward December 2020.
Flattening curve (decrease in price between two deliveries) when the market anticipates interest rates will rise faster in the nearby deliveries than the forward deliveries, example, nearby would be March 2019 forward December 2020.
16.1) Exchanges we trade on
16.2) Brokerage firms
16.3) What an ATA is and how they work
16.4) Fee structure
16.5) How to define overall risk on your account
16.6) How balances are protected
16.7) Open An Account
Peter Knight Advisor