+89.67% Trading Interest Rates Higher, Trade Dates 22 August 2016 To 20 January 2017

by: Peter Knight

Summary

Overall gain for the 4 rate trades posted on Seeking Alpha +89.67%.

Trade 1 = +69.31%, trade entry date 1 September 2016.

Trade 2 = +119.17%, entry 22 August 2016.

Trade 3 = +94.00%, entry 29 August 2016.

Trade 4 = +94.05%, entry 21 September 2016.

Since our 13 January 2016 update on Seeking Alpha we've gained another 9.51% trading interest rates higher, below is full disclosure of what we're trading and how including links to monitor these trades forward.

Latest Fed guidance for rates 14 December 2016

Date Fed Funds 3 Month Deposits
Current 0.50%-0.75% 1.00%-1.25%
Dec-17 1.40% 1.90%
Dec-18 2.10% 2.60%
Dec-19 2.90% 3.40%

I believe the economy is looking far better than September 2014 and the Fed will revise its outlook for rate hikes higher over the next 6-36 months to be more in line with their September 2014 guidance.

Fed guidance for rates September 2014

Date Fed Funds 3 Month Deposits
Current 0.50%-0.75% 1.00%-1.25%
Dec-17 2.50% 3.00%
Dec-18 3.50% 4.00%

Performance and position update

Trade 1+69.31%

A) Entry date 1 September 2016
Position: Short December 2019 delivery (GEZ19)
Entry price: 98.6150
Market's anticipated 3 month rate by December 2019 = 1.3850%
Position value $3,462.50
Exchange margin requirement $510
I've allocated $3,462.50 to avoid any margin issues.
Each 0.01 move = $25.00 per contract
Original trade entry posted on Seeking Alpha 5 September 2016
What the 3 month rate contact is and where it's traded
3 month interest rate futures contract specifications

B) 20 January 2017
Current GEZ19 contract price 97.6550
Market's current anticipated rate by December 2019 = 2.2450%
Open Trade Equity +$2,400.00,
Allocation valuation has appreciated to $5,862.50, +69.31%

Objective

C) Using the latest Fed guidance for where the Fed sees rates by December 2019 Fed Funds should increase to 2.90%, 3 month deposit rates to 3.40%. The 3 month December 2019 contract price should fall to 96.60 (100.00 - 3.40 = 96.60), trade entry position value of $3,462.50 should increase to $8,500. Using Fed guidance from September 2014 of 4.25% the contract price would fall to 95.75 with the position value increasing to $10,625.00, +145.48%.

Current chart to monitor this trade forward. We're looking for the price of the contract to fall from 97.6550 to 96.60 or lower between now and December 2019 as 3 month deposit rates rise, each 0.01 = $25.00


Trade 2+119.17%

A)Trade entry date 22 August 2016
Long March 2017 (GEH17) 98.9250
Short December 2018 (GEZ18) 98.8200
We're anticipating the GEH17 GEZ18 spread to widen from 0.1050
Position value $262.50
I've allocated $1,500.00 to avoid margin issues and have the option to add positions should the spread price decrease.
Each 0.01 change $25.00
Exchange margin requirement $470
Original trade entry posted on Seeking Alpha 5 September 2016

B)20 January 2017
Long March 2017 (GEH17) current price 98.9000
Short December 2018 (GEZ18) current price 97.9900
Current Spread 0.9100
Position value $2,275.00
Open trade equity $2,012.50
Less all hedge and commission costs -$225.00
Net gain = $1,787.50
Current $1,500 allocation valuation $3,287.50, +119.17%

Objective

C) If I am correct and the Fed revises their rate expectations to be more in line with their September 2014 guidance this spread will widen to 1.4250 increasing the position value to $3,562.50 generating an overall increase in the $1,500 allocation valuation to $4,800.00, +220.00%.

Current chart to monitor this trade forward, we're looking for the spread to increase as the December 2018 (GEZ18) contact price falls to reflect the increase in 3 month deposit rates, each 0.01 = $25.00

Trade 3 +94.00%

A)Trade entry date 29 August 2016
Long March 2017 (GEH17) 98.9250
Short December 2020 (GEZ20) 98.5050
We're anticipating the GEH17 GEZ20 spread to widen from 0.4200
Position value $1,050
I've allocated $2,500.00 to avoid margin issues and have the option to add positions should the spread price decrease.
Each 0.01 change $25.00
Exchange margin requirement $525
Original trade entry posted on Seeking Alpha 5 September 2016

B)20 January 2017
Long March 2017 (GEH17) current price 98.9000
Short December 2020 (GEZ20) current price 97.4500
Current Spread 1.4500
Position value $3,625.00
Open trade equity $2,575.00
Less all hedge and commission costs = $225.00
Net gain = $2,025.00
Current allocation valuation $4,850.00, +94.00%.

Objective

C) If I am correct and the Fed revises their rate expectations to be more in line with their September 2014 guidance this spread will widen to 2.6750 for an increase in position value to $6,687.50 generating an overall increase in the $2,500 allocation valuation to $8,137.50, +225.50%.

Current Chart to monitor this trade forward, we're looking for the spread to increase as the December 2020 (GEZ20) contact falls in price to reflect the increase in 3 month deposit rates, each 0.01 = $25.00

Trade 4 +94.05%

A) Entry date: 21 September 2016
Position: Short December 2018 Fed Funds (ZQZ18)
Entry price: 99.1650
Market's anticipated Fed Funds rate by December 2018 = 0.8350%
Position value = $3,480.00
Exchange margin requirement = $710
I've allocated $3,500 to avoid any margin issues
Each 0.01 move = $41.67 per contract
What the Fed Funds rate is and how it's set
Fed Funds contract Specifications
Original trade entry posted on Seeking Alpha 21 September 2016

B) 20 January 2017
Short December 2018 ZQZ18 current price 98.3750
Market's current anticipated rate by December 2018 = 1.6250%
Open Trade Equity = +$3,291.67
Allocation value = $6,791.67, +94.05%

Objective

C) Using the latest Fed guidance for where the Fed sees rates by December 2018 the Fed Funds rate should increase to 2.10%. The December 2018 contract price would fall to 97.90 (100.00 - 2.10 = 97.90), position value would increase to $8,750.00. Using Fed guidance from September 2014 of 3.50% the contract price would fall to 96.50 with the position value increasing to $14,583.33.

Current chart to monitor this trade moving forward. We're expecting the Fed funds (ZQZ18) contract price to fall to 97.90 or lower between now and December 2018 as the Fed Funds rate rises, each 0.01 = $41.67.

I do not handle US accounts. If your existing broker is not familiar with these instruments/trades and you need a broker/firm that can accommodate US business contact me through Seeking Alpha and I'll provide the name of a US broker whom I worked with on the Exchange floor (when there was a floor)

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Disclosure: I've been a professional trader and run a family office from Tortola, British Virgin Islands for the past 20+ years, zero income, corporate, sales and inheritance tax and would like to keep it that way. Because of the potential tax implications I do not manage US accounts or sell advisory services to US clients. I do however manage funds for qualified non U.S. investors and entities. I may at times for my own accounts or for the accounts I manage have positions on that could be contrary to the ones mentioned in my reports.

Additional Disclosure


Disclosure: I am/we are long SHORT THE POSITIONS IN THIS REPORT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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