My Experiences Trading U.S. Bonds and Interest Rate Commodity Futures Contracts and Options

U.S. Bonds are the king of interest rate futures and a great trading market! Here s some valuable hints and kinks taken from actual trading experiences. When it comes to trading interest rate futures, there s no market like US Bonds! It s the most liquid and has the best price swings of the interest rates group. US Bond futures contracts are also called the long bond or the 30-year bond, James Bond. Trailing behind are the ten year and five year note futures, though these have gained some popularity due to the real estate “bubble.” The full-size US Bonds future contract contains $100,000 of bonds (par value) and is controlled with about $1300 of trading account margin money. Each full point move is equal to $1,000. The mini-contract is one-half the full-size contract and is better suited for the beginning trader. Trading is on the Chicago Board of Trade, a large and reputable commodity exchange. The liquidity is excellent and the volatility makes day trading popular for both advanced and novice traders alike. Because of this deep liquidity, at the market stop loss orders are usually triggered with a very little slippage. A broker friend of mine swears by US Bond option strangle strategies. This is a popular technique selling (writing) both a put and call option outside a price range, looking for them to expire worthless. Option writers look to collect the option premiums from the option buyers. The option writers want the market to stay within a range of prices while the option buyers are speculating on a large move outside this range. A one-day US Bond contract move of three full points is probably the maximum that you will see. ($3,000 move per contract) This is a rare event usually caused by a big surprise from the Fed, the release of a government financial report or an unforeseen event. Since US T-Bond futures become most volatile around scheduled major reports, it s often wise to take your profits beforehand. Many reversals occur around these times. The old trading adage, first way, wrong way means the first price reaction to a report is usually wrong. For example, a long awaited report comes out and the market immediately runs up. A few minutes later the professionals sell heavily into this rally and the market sells off sharply. This spells opportunity for sharp traders and potential losses to others. US Treasury bond futures are presently traded electronically through the CBOT. This means you can get order fills almost instantaneously. The days of the screaming commodity pits may be limited. Fed Fund futures trade the reverse of rates. For example, March Fed Funds futures at 95.00 would equate to traders expecting Fed fund rates to be 5% in March. (100%-95% = 5%) The 30-year bond is one of the best indications of general interest rate direction. The trend of the fed fund rates is also key. Be sure to consider both US Bonds and Fed Funds trends in your general rates forecasts. Treasury bonds tend to make double tops. Sell against double and triple tops when they present themselves. These long term tops don’t happen very often, so keep your eyes open. Triangles are also popular as well as head and shoulders formations. The bond market often trends well for long periods. Major multi-year government policies put these trends in motion. Fortunes can be made by accurately trading the bond market. Here s how I look for opportunities in the U.S. Bond market: First I generate a TimeLine forecast that shows a strong move up or down. The TimeLine is based on time cycles and other preprogrammed patterns. I then determine if the move is expected to be choppy, trending, and for how long. This helps us focus on possible directional futures/option positions or writing options in a range, or even writing options with the trend. Next I use automated option software to search for the best of 1600 strategies based on the expected market move. I compare these option to option combinations against futures to options combinations. At some point I will find a compromise between risk, profit and simplicity in one or two strategies. In hindsight there s always a best strategy we could have used. Keep this is mind when narrowing down the choices. When finished, we want to have one or two potential trades to work with. We call the selected few, high probability, low risk trades. Remember there is more to planning a trade than just coming up with a forecast. The market may move as predicted but we can still lose by choosing the wrong trading vehicles. Pick the right vehicles and strategies that will allow us to stay in the market without excessive fear, but still carrying calculated risk. We NEED to take on calculated risk or the market will not pay us for our services. In addition, the vehicle has to move far enough to make a profit without letting the expense of protection eat us up. Excessive protection (risk avoidance) can come in the form of option premiums, too close-in stop loss orders - and overdone, complex spread strategies. Matching a forecast to a strategy is an important skill to succeed in commodity trading. Good Trading! There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used. Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his market forecast TimeLine Trading charts and get his complete 44 lesson, Thomas Commodity Trading Course - all free. thomascapitalmanagement.com/commodity/welcome.htm Main site: ThomasCapitalManagement.com