Eurodollar spreading

[Martinghoul]

Quote from cdcaveman:
it just seems looking at the GE futures prices, one would sell front buy back.. yet i keep hearing people talking about buying front and selling back... obviously i understand the inverse relationship between futures prices and the interest rate curve that is derived from it..
a long calender in GE futures is long short term interest rates, and short longer term interest rates..

Yes, correct, when you're long the calendar spread, you've got a steepener (long shorter-dated futures, short longer-dated futures).

short the front contract , prices go down = interest rates go up(long interest rates) & long the back contract price goes up, interest rate goes down. This obviously is an expression that tapering would be farther off then the futures are now implying.

Right, so if you've got a flattener (short shorter-dated futures, long longer-dated futures) you could potentially benefit from two possible outcomes: 1) rate rises don't happen for a long time and both your contracts "roll" down; 2) rate rises happen earlier than the mkt expects and not much more is priced.

so if your shorting the front , going long the back, you are expressing a view that near term futures prices will rise slower the your back contract. this could as well just be an expression of rolling off the curve from longer dated contract spreads turning into shorter dated contract spreads.. right?

Yes, given the current shape of the Eurodollar strip, this type of flattener trade will "roll" in your favor. Obviously, you're taking on some risk in exchange for this "rolldown" (a "flattener" in a current regime is a long the mkt trade).

 

[cdcaveman]

Quote from cdcaveman:

a long calender in GE futures is long short term interest rates, and short longer term interest rates..

Quote from Martinghoul:

Yes, correct, when you're long the calendar spread, you've got a steepener (long shorter-dated futures, short longer-dated futures).

a long calender in every product i've ever traded has been short front future, long back future,, and or options

maybe you said that wrong? when i'm saying long interest rate i'm saying short futures contract.. interest rates go up, when futures go down.....

a steepening of the curve would be the front contract going up in relation to the back contract going down or just a widening..

then being long the front and short the back, would be a short calender spread,, in which you would be short near term interest rates(or long the futures), and long long term interest rates(or short the futures)..

are we on the same page? as long as i ever knew.. a long calender spread was short the front contract... unless in this product a long calender is referring to the interest rate curve derived from the futures contract prices..

 

[cdcaveman]

Quote from Martinghoul:


Right, so if you've got a flattener (short shorter-dated futures, long longer-dated futures) you could potentially benefit from two possible outcomes: 1) rate rises don't happen for a long time and both your contracts "roll" down; 2) rate rises happen earlier than the mkt expects and not much more is priced.

roll down,, here means convergence to spot.. the nature flow of far dated futures spreads to near dated futures spread, "roll off" the end of the interest rate curve.. this is where the front falls off the curve faster then the back is..

Yes, given the current shape of the Eurodollar strip, this type of flattener trade will "roll" in your favor. Obviously, you're taking on some risk in exchange for this "rolldown" (a "flattener" in a current regime is a long the mkt trade).

so a "flattener" or roll down spread in the current regime? you mean current fed environement? and what do you mean "a long the market trade" ....??

 

[Martinghoul]

Quote from cdcaveman:
Quote from cdcaveman:
a long calender in every product i've ever traded has been short front future, long back future,, and or options

maybe you said that wrong? when i'm saying long interest rate i'm saying short futures contract.. interest rates go up, when futures go down.....

Dunno about other products, but in Eurodollars a long calendar spread position is defined as being long the nearer and short the further contract.

And let's stick to a consistent terminology. So don't say "long interest rate", since that's very confusing. In rates, "long" is always used to refer to a position where you benefit from rates going down, i.e. long the futures.

a steepening of the curve would be the front contract going up in relation to the back contract going down or just a widening..

then being long the front and short the back, would be a short calender spread,, in which you would be short near term interest rates(or long the futures), and long long term interest rates(or short the futures)..

This is a long cal spread position and see above re terminology.

are we on the same page? as long as i ever knew.. a long calender spread was short the front contract... unless in this product a long calender is referring to the interest rate curve derived from the futures contract prices..

Well, you see in rates everything is backwards because prices are the inverse of rates.

 

[cdcaveman]

Quote from Martinghoul:

Dunno about other products, but in Eurodollars a long calendar spread position is defined as being long the nearer and short the further contract.

And let's stick to a consistent terminology. So don't say "long interest rate", since that's very confusing. In rates, "long" is always used to refer to a position where you benefit from rates going down, i.e. long the futures.

This is a long cal spread position and see above re terminology.

Well, you see in rates everything is backwards because prices are the inverse of rates.

perfect.. i know exactly now how to speak the language..

 

[Martinghoul]

Quote from cdcaveman:

so a "flattener" or roll down spread in the current regime? you mean current fed environement? and what do you mean "a long the market trade" ....??

Yes, I mean current Fed stance. By "long the mkt trade" I mean that, at the moment, Eurodollar flattener trades behave like longs, i.e. the Eurodollar strip tends to flatten on a rally (rates going down) and steepen on a selloff (rates going up).

 

[cdcaveman]

Quote from Martinghoul:

Yes, I mean current Fed stance. By "long the mkt trade" I mean that, at the moment, Eurodollar flattener trades behave like longs, i.e. the Eurodollar strip tends to flatten on a rally (rates going down) and steepen on a selloff (rates going up).

it seems to me the entire verbage is related to the interest rate curve derived from futures prices.. as in the front has a lower interest rate and gradually gets to be a larger interest rate as you head towards the back, creating a curve that looks like contango..

so when you say steeper you mean the interest rates are going down in the front and up in the back.. a flattening trade would send the interest rates flatter, higher in front, lower in the back.. i've heard that have inverted before... my father told me..

naturally investors require higher rates on longer maturity bonds, putting the interest rate typically higher the farther you go out.. this is all correct right..
Honestly i've watched the price action of the curve for the last month, and i can see how i could trade it, yet i didn't have a complete understanding of what the heck it all meant.. plus, i won't trade any new products unless i've got a in depth understanding and have done in depth historical studies on the relationships and there bounds..

 

[Martinghoul]

Quote from cdcaveman:
it seems to me the entire verbage is related to the interest rate curve derived from futures prices.. as in the front has a lower interest rate and gradually gets to be a larger interest rate as you head towards the back, creating a curve that looks like contango..

so when you say steeper you mean the interest rates are going down in the front and up in the back.. a flattening trade would send the interest rates flatter, higher in front, lower in the back.. i've heard that have inverted before... my father told me..

naturally investors require higher rates on longer maturity bonds, putting the interest rate typically higher the farther you go out.. this is all correct right..
Honestly i've watched the price action of the curve for the last month, and i can see how i could trade it, yet i didn't have a complete understanding of what the heck it all meant.. plus, i won't trade any new products unless i've got a in depth understanding and have done in depth historical studies on the relationships and there bounds..

You got it... And yeah, it's a somewhat esoteric world, so it's worth exploring it first, before you decide to dive in. There are some good books/papers that can help, if you need.

 

[cdcaveman]

Quote from Martinghoul:

You got it... And yeah, it's a somewhat esoteric world, so it's worth exploring it first, before you decide to dive in. There are some good books/papers that can help, if you need.

i've read a few papers on the cmegroup website..

http://www.cmegroup.com/trading/interest-rates/files/eurodollar-futures-reference-guide.pdf

http://www.cmegroup.com/trading/int...lar_Futures_Interest_Rate_Building_Blocks.pdf

got any others>>>>?? alot of the papers show the arb relationships amoungst other interest rate products.. obviously not to many talk about strategies for trading..

 

[Martinghoul]

Quote from cdcaveman:
i've read a few papers on the cmegroup website..

http://www.cmegroup.com/trading/interest-rates/files/eurodollar-futures-reference-guide.pdf

http://www.cmegroup.com/trading/int...lar_Futures_Interest_Rate_Building_Blocks.pdf

got any others>>>>?? alot of the papers show the arb relationships amoungst other interest rate products.. obviously not to many talk about strategies for trading..

These papers are really there to advertise CME products.

I would suggest "Understanding the Yield Curve" papers by Antti Ilmanen (you can google for them), as well as the "Eurodollar Futures and Options Handbook" (that's a proper book).