A bond futures contract allows a trader to speculate on the price movement of a bond and lock in a price for a specific period of time. If a trader buys a bond futures contract and the price of the bond rises and closes higher than the contract price at expiration, the trader makes a profit. At that point, the trader might either take delivery of the bond or unwind the position by offsetting the buy order with a sell deal, with the difference in prices being settled in cash.
To trade bond futures, how much money do you need?
Open an account with an online futures brokerage firm that specializes in Treasury futures trading. The minimum amount required to start an account is set by each broker, however all businesses must adhere to the exchange’s margin requirements. To trade one Treasury futures contract, you must deposit $1,500 to $3,000 to cover the initial margin and at least $1,500 to cover the maintenance margin. The amount required is determined by the underlying Treasury securities’ maturity date.
Bond futures pay interest, right?
The factor (which varies every contract month, or every March, June, September, and December) for delivering the Feb. 15, 2015, 11.25 percent-coupon bond against the September futures contract is 1.2832, as shown in the table.
Crunching the Numbers
This leads us to the relationship between the cash bond price and the futures price, which is expressed as an equation. It goes like this:
The basis is the premium an investor would pay for a cash bond over a futures contract, as shown in the equation. Why would an investor prefer to buy a cash bond over a contract? Because it is a bond, the cash bond pays interest. A futures contract is simply that: a contract. It is not remunerated in any way.
Unfortunately, the situation is a little more complicated. The base does not merely represent the coupon income that a cash bond holder would receive until delivery. It is the difference between the coupon revenue and the cost of financing a cash bond position at an overnight interest rate for the investor. The difference is referred to as the cost of carrying. The majority of the base is made up of cost of carry. The remainder is the value of the futures seller’s delivery options.
Is it possible to day trade bonds?
To begin, you must first determine which stocks you will buy and sell. Bonds, options, futures, commodities, and currencies are all available for day trading, but stocks are the most popular because the market is large and busy, and commissions are minimal or nonexistent.
In the bond market, how much is one tick worth?
Rule 612, often known as the Sub-Penny Rule, was introduced by the Securities and Exchange Commission in 2005. Equities exceeding $1.00 must have a minimum tick size of $0.01, while stocks under $1.00 can be quoted in $0.0001 increments, according to Rule 612. Decimalization was the name for this procedure. The Securities and Exchange Commission (SEC) now compels all U.S. exchanges to use hundredths, which is why most equities now have a tick size of $0.01, or one cent, but it has lately experimented with bigger tick sizes for some less liquid securities.
Is it possible to trade futures without using leverage?
Trading in futures is, as we all know, quite similar to trading in the cash market. Futures, on the other hand, are leveraged because they merely require a margin payment. If the price change goes against you, however, you will have to pay mark to market (MTM) margins. Trading futures presents a significant difficulty in terms of minimizing leverage risk. What are the dangers of investing in futures rather than cash? What’s more, what are the risks of trading in the futures market? Is it possible to utilize efficient day trading futures strategies? Here are six key techniques to limit the danger of using leverage in futures trading.
Avoid using leverage just for the sake of using it. What exactly do we mean when we say this? Assume you have a savings account with a balance of Rs.2.50 lakhs. You want to invest the funds in SBI stocks. In the cash market, you can buy roughly 1000 shares at the current market price of Rs.250. Your broker, on the other hand, claims that you can purchase more SBI if you buy futures and pay a margin. Should you invest in futures with a notional value of Rs.2.50 lakh or futures with a margin of Rs.2.50 lakh? You can acquire the equivalent of 5000 shares of SBI if you buy it with a margin of Rs.2.5 lakh. That implies your profits could rise fivefold, but your losses could also rise fivefold. What is a middle-of-the-road strategy?
That brings us to the second phase, which is deciding how many SBI futures to buy. Because your available capital is Rs.2.50 lakh, you’ll need to account for mark-to-market margins as well. Let’s say you predict the shares of SBI to have a 30% corpus risk in the worst-case scenario. That means you’ll need Rs.75,000 set aside solely for MTM margins. If you want to roll over the futures for a longer length of time, you must throw in a monthly rollover cost of approximately 1%. So, if you wish to extend your loan for another six months, you’ll have to pay an additional Rs.15,000 to do so. Additional Rs.10,000 can be provided for exceptional volatility margins. Effectively, you should set aside Rs.1 lakh and spend only Rs.1.50 lakhs as an initial margin allowance. That would be a better way to go about calculating your initial margins.
You can hedge your futures position by adding a put or call option, depending on whether you’re holding futures of volatile equities or expecting market volatility to rise dramatically. You may ensure that your MTM risk on futures is largely offset by earnings on the options hedge this manner. Remember that buying options has a sunk cost, which you should consider carefully after considering the strategy’s risks and rewards.
Use rigorous stop losses while trading futures. This is a fundamental rule in any trading activity, but it will ensure that you exit losing positions quickly. Is it feasible that the stock will finally meet my target after I set the stop loss? That is entirely feasible. However, as a futures trader, your primary goal is to keep your money safe. Simply exit your position when the stop loss is triggered. That’s because if you don’t employ a stop loss, you’ll end up losing money.
At regular intervals, book profits on your futures position. Why are we doing this? It ensures that your liquidity is preserved, and it adds to your corpus each time you book gains. This means you’ll be able to get more leverage out of the market. Because you’re in a leveraged position, it’s just as crucial to keep your trading losses to a minimum as it is to maintain your trading winnings to a minimum.
Last but not least, keep your exposure from becoming too concentrated. If all of your futures positions are in rate-sensitive industries, a rate hike by the RBI could have a boomerang impact on your trading positions. To ensure that the impact of unfavorable news flows does not become too prohibitive, it is always advisable to spread out your leveraged positions. It has an average angle as well. When we buy futures and the price of the futures drops, we usually average our positions. Again, this is risky since you risk overexposure to a certain business or theme.
Leverage is an integral aspect of futures trading. How you manage the risk of leverage in futures is entirely up to you.
Is it possible to trade futures without using margin?
Although you must have enough in your account to cover all day trading margins and variations that come from your positions, there is no legal minimum balance you must maintain to day trade futures. The day trading margins differ from broker to broker.
Do bond prices stay the same throughout time?
Bond pricing do not fluctuate over time. A bond issuer is required to pay interest on a regular basis. Bonds do not grant corporation ownership rights. A bond is a type of financial instrument.
What is the rule for bond pricing?
To price a coupon-paying bond, a sequence of spot rates must be computed each cash flow must be discounted using the proper spot rate, such that the sum of the present values of all cash flows equals the price.
