Relative Value Futures Trading - How to Trade Relative Value Futures

Relative Value Futures Trading - How to Trade Bond Futures - Thinkorswim Pair Trading, Relative Value Trading Futures

If you’re certain that an outright (a futures contract on its own) is mispriced, you can enter an outright trade. You can form an opinion about an outright by either looking at different flies or spreads that include the outright itself or you can observe its behavior near implied move ranges. Since it is a directional trade without any opposite position, i.e. you’re long or short only this outright, you are exposed to the highest degree of yield curve risk but this also means that the potential reward is comparatively greater.
How to trade Futures Spreads with Interest Rate Futures

If you want to correct whole sections of the curve at once by anticipating partial steepenings or flattenings of the yield curve, you can buy or sell the related spreads.

• Steepening: Buying the shorter maturity contract, i.e. front leg, of a spread and selling the longer maturity, i.e. the back leg, of that spread. For example, you can long the TUF or NOB with the appropriate ratios. In case of the TUF, you would be long the 2Y front leg (ZT with TUF ratios) and short the 5Y back leg (ZF with TUF ratios) and in case of the NOB, you would be long the 10Y front leg (ZN with NOB ratios) and short the 18Y back leg (ZB with NOB ratios).
• Flattening: This is basically the opposite of the steepening trade. Buying the longer maturity contract and selling the shorter maturity contract of the spread. For example, seling the FIT would result in a long 5Y ZF position and a short 2Y ZT position (FIT ratios still need to be applied).
This trade, while safer than the outright trade, still exposes you to a medium degree of risk, because if you are positioning yourself for a steepening and a flattening occurs, you will lose your position.

Because this position features a long and a short position, you are not as vulnerable to yield curve rallies or slumps as you would be with just an outright contract, as in case of a rally, you still have a long position and in case of a slump you still have one short position which offsets the yield curve impact, but due to the differences in volatility between shorter and longer maturity bonds, this offset might not be strong enough to keep a position in place.
B U T T E R F L I E S
The safest way to profit from bond yield curve inefficiencies is to use bond butterflies.
Since a butterfly position consists of 2 belly contracts and 1 left and 1 right wing contract, you can be either short 2xbelly and long the wings, which is equal to shorting a butterfly, or long the 2xbelly and short the wings.
This means that the yield curve risk is mitigated to a large degree. For example, if you short a ZN butterfly with a ZF left wing, 2xZN belly and a ZB right wing, you are hoping that the ZN contracts depreciate and the two wing contracts depreciate. If the market rallies for example, your ZN contracts will suffer, but you now have 2 long wing contracts that are appreciating in value as well.
Now that one wing contract is lower and the other is higher in volatility than the belly contracts, you are able to better offset the losses incurred by the belly contracts.
While it is the safest way to play a specific yield curve correction centered around the belly contracts, it is also the most capital intensive and thus the variant with the worst initial margin to reward ratio.

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Jonathan Rose teaches unusual options activity trading, gamma scalping, how to trade bond futures and interest rate futures on ThinkorSwim, and VIX term structure. Jonathan uses ThinkorSwim, and the “Wall Street Wiretapper” from Masters in Trading (The software that lets you spy on Wall Street’s big institutional insiders).

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== BINGE-WORTHY CONTENT BY CATEGORY ==

Unusual Options Activity: https://www.youtube.com/playlist?list=PLR_XM0ZsTUyTJhBEy30h_pyqtxyQZKN2X

Gamma Scalping: https://www.youtube.com/playlist?list=PLR_XM0ZsTUyR7cZ8Bgcc8TL2tPVWWMATB

Trading Bond Futures and Interest Rate Futures: https://www.youtube.com/playlist?list=PLR_XM0ZsTUyRMLPwWba3R5W8Lh52lGVEX

VIX Term Structure: https://www.youtube.com/playlist?list=PLR_XM0ZsTUyR1fQJXvwFE2P4AqoA47uvZ

Видео Relative Value Futures Trading - How to Trade Relative Value Futures канала Jonathan Rose