Futures

Helping You Trade the Interest Rate Markets

dondawson
Don Dawson
Instructor

Trading the Interest Rate markets may seem a little intimidating at first. However, after you understand how to do the math for your profit and loss they become no different than any other market or asset class you now trade.

Free Trading WorkshopIn this article, I am going to focus on the 30 year Treasury Bond Futures (US or ZB) contract.  This contract started trading in 1977 at the Chicago Board of Trade.  The face value of the contract is $100,000.  Each point (handle) is worth $1,000.  It takes 32 ticks to make one handle and each tick is worth $31.25.  As with other Futures contracts we trade, the Futures contract must be priced in the same format as the Cash market it is a derivative of.  This way when the commercials place hedges, they are an apples to apples cash to Futures equation.

The problem most new interest rate Futures traders run into is the fact that the Bond market is traded in 32nds.   This is unlike the mini S&P (ES) contract that trades in decimals of .25 at $12.50 per tick. ES is traded in a format like most traders are familiar with from trading Stocks, and that is the decimal format.

I traded the 30 year Bond Futures for many years in the 80’s and 90’s.  Before we had computers all of our math was done with a table similar to the one I am sharing with you in this article.  If off the floor traders and the floor traders themselves could do this math on the fly so can you.

Bond prices are quoted like this 154’12 and would be read as “one hundred fifty-four and twelve thirty seconds”.   Each handle is 32 ticks so the 154 is like saying 154 handles.  The 12 represents the ticks in the Bond market and would be 12/32nds.

Let’s say you have an entry at 154’12 and want to risk 13 ticks.  The math for most markets would be 154.12 – .13 = 153.99. But for the Bond market this would not be correct because we trade in 32nds (the price can’t end in .99) and 13 ticks from 154’12 would actually equal 153’31.

Since we cannot subtract or add larger values to our Bond quotes we must convert the Bond quote that is in fractions into decimal format.  Table 1 shows what value each Bond tick in 32nds is worth in a decimal format.  It is important to use all the decimal places or you may have to round up or down.  The math to get these values is simply the tick in 32nds divided by 32 equals the decimal value for each tick.

ddawson-20150811-decimal-conversion-chart

In our previous example this is how the math would have worked:

ddawson-20150811-decimal-conversion-trade

We start with the entry price and convert that to a decimal format.  Since the 154 is already full handles we do not have to make any changes to that number.  The only number we need to convert to decimal is the tick of 12, and looking at Table 1 we see the value for 12 32nds is .37500.  Entry price decimal is 154.37500.

Our stop value is 13 ticks.  All Bond ticks have to be converted to decimals so we use Table 1 again and find 13 32nds and see a decimal value of .40625.

Anytime you have to do math for the Bond markets (addition, subtraction, multiplication or division) you do the math in the decimal format.  For this example we subtract the decimal ticks from the decimal entry price.  This gives us 153.96875.  Using decimal math allows for any size of stop or target, large or small, to be calculated quickly and correctly.  We then look back on Table 1 and see that .96875 in decimal format equals 31/32nds.  When we put the handle and the 32nds together we get 153’31.

Here is an example of a trade setup and its values:

ddawson-20150811-decimal-conversion-trade1

To figure our entry and stop in decimal we use the table above and just replace the fractions with decimal equivalent and attach that to the handle.

To get risk we subtract the entry and stop price in decimal format and get .25000.  Looking at our table we see that .25000 decimal format equals 8/32nds.

Our target is 3 times our risk.  3 X 8 = 24/32nds.  Our Table shows us that 24/32nds is equivalent to .75000.  We then add our entry in decimal of 154.09375 to our target in decimal of .75000 and we get 154.84375.  Looking at our table we see that .84375 is equivalent to 24/32nds.  Put the ticks and handles back together and we get 154’27 for a target.

Any math you need to do with the US or ZB market can be done using Table 1.  I would recommend you print Table 1 and have it accessible when you need to calculate your next trade’s profit and loss.  After some practice you will be doing these in your head just like us experienced Bond traders do.

“Put your heart, mind and soul into even your smallest acts.  This is the secret of success.”  Swami Sivananda

-Don Dawson

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.