In this episode, Pete discusses the rollover process in which traders carry forward their positions in a futures contract, from one expiration date to another. Traders can either let a position expire or carry forward their bets. They can do this by entering into a similar contract expiring at a future date. The presentation continues by looking at the closing price of the spread between the /ZBZ14 contract and the /ZBH15 contract. This is the spread between the December and the March 30 year bond contract.
By examining the open interest (which is the total number of longs or shorts in the market) between the two month, one can see that the new month’s open interest is equal to the old month’s open interest after the roll. Pete then illustrates this in a graph where we can visually see the open interest in the expiring month decline and the open interest in the next month begin to increase reaching the same level. Continuing on with open interest Pete notes that volume is often concentrated in the front month until the roll. Also to note, only a small percentage of total open interest goes all the way to delivery. Positively sloped yield curves and positive carry impose price discounting on deferred contract months.
Next Pete looks at why the big price jump in the classic bond between March 15 and June 15 exists. By this we are seeing a 19 point jump, if a positive sloped yield curve and positive carry impose price discounting on deferred contract months. We see that there was a change in the amount of time the newly listed bonds have for sensitivity and duration. The price of the June 15 contract is significantly higher than the March 2015 because the greater duration of the cheapest to deliver (CTD) and this results in a higher price of the underlying bond. What happened was the U.S. Treasury suspended issuance of the 30 year bonds between early 2001 and early 2006, thus creating a gap in the delivery basket of bonds.
So to make the delivery basket more uniform, the CME Group decided to exclude the 5-⅜% February 2031 US Treasury bond from contract grade eligibility for the June 2015, September 2015, and December 2015 delivery months. The change in the delivery basket affects the valuation of the contract. Both the implied BPV and the implied modified duration go up in value. Finally, the June 2015 contract is significantly higher than the March 2015 because the greater duration of the CTD results in higher price of the underlying bond.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
More like this
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2023 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.