Commodities

Old School Meets New Students – Getting a Handle on Interest Rate Futures Contracts

dondawson
Don Dawson
Instructor

Part of understanding a Futures contract is to understand what a minimum tick and the dollar value of that minimum tick is.  Markets like the Stock Index Futures are relatively easy to get a grasp of what these values are.  While markets like the Interest Rate sector seem to be very challenging to new traders.

A minimum tick is the smallest increment that the price of that Futures contract can change from one price change to the next.  Unlike a Stock price Futures will never trade between the bid and the ask price.  If the mini S&P is bid at 1849.00 and Offered at 1849.25 you will never see a transaction being made between these two prices.  The minimum tick in the mini S&P contract is .25.  All things being equal the next trade should be at the bid or the offer.  There are times when poor market liquidity causes the market to trade at bigger tick intervals due to news, technical stops being hit or some other event causing a disruption to the normal flow of orders.

The minimum tick value is the dollar value of each minimum tick.  For the mini S&P that dollar value is $12.50.  As each minimum price move occurs this would equate to an effect on your account of $12.50 per contract you are trading. A series of ticks will make up a point (also known as a handle).  The mini S&P trades in .25 increments, meaning it would take 4 of these .25 moves to equal one handle.

1867.25 moves to 1868.25 = 4 ticks or 1 handle

If each tick value is $12.50 that would be $50.00 per handle

This was the easy information to understand because most new traders were raised with arithmetic dealing in decimals.  For some of us old school folks we were raised to understand fractions. This makes understanding how the Interest Rate markets are priced in fractions a little easier.

Here is where old school meets new students.  The longer term Treasury Futures started trading in 1975 at the Chicago Board of Trade.  This included Treasury Bonds, Muni–Bonds and Treasury Notes.  While the Treasury Bills and Eurodollar Interest Rate instruments started trading at the Chicago Mercantile Exchange.  Fractions were a way of doing business at this time including the Stock market which later switched over to the decimal system.  However, our beloved Interest Rate instruments did not make that switch over to decimal and has since remained in fractions.

Table 1 will illustrate the Interest Rate markets and their minimum ticks, tick values and handle values.

Market

Minimum Tick

Tick Value

Handle Value

30 Year US

1/32

$31.25

$1,000

10 Year TY

1/64

$15.63

$1,000

5 Year FV

1/128

$7.81

$1,000

Table 1

The 30 Year Treasury Futures (US) trades in a minimum of 1/32’s.  For each of these minimum price changes per contract the net effect would be $31.25.  To get a handle it would take 32 of these minimum ticks and it would equal $1,000.

132’12 moves to 133’12 = 32 ticks or 1 handle

If each tick value is $31.25 that would be $1,000 per handle

How do you read a US quote?  Using the example above of 132’12 we would say it as 132 handles and 12/32’s, making the value of the contract while trading at this price equal to $132,375.  To arrive at this contract value you would simply multiply the handles by $1,000 and the 32’s by $31.25.

The 10 Year Treasury Futures (TY) trades in a minimum of 1/64’s.  For each of these minimum price changes per contract the net effect would be $15.63. In reality the minimum tick value is $15.625, but the Exchange rounds it up to $15.63. Too get a handle it would take 64 of these minimum ticks and it would equal $1,000.

124’09.5 moves to 125’09.5 = 64 ticks or 1 handle

If each tick value is $15.63 that would be $1,000 per handle

How do you read a TY quote?  Using the example above of 124’09.5 we would say it as 124 handles and 09.5/32’s, making the value of the contract while trading at this price equal to $124,296.88.  To arrive at this contract value you would simply multiply the handles by $1,000 and the 32’s by $31.25.

The 5 Year Treasury Futures (FV) trades in a minimum of 1/128’s.  For each of these minimum price changes per contract the net effect would be $7.81. Too get a handle it would take 128 of these minimum ticks and it would equal $1,000.

119’21.75 moves to 120’21.75 = 128 ticks or 1 handle

If each tick value is $7.81 that would be $1,000 per handle

How do you read a FV quote?  Using the example above of 119’21.75 we would say it as 119 handles and 21.75/32’s, making the value of the contract while trading at this price equal to $119,679.69.  To arrive at this contract value you would simply multiply the handles by $1,000 and the 32’s by $31.25.

One of the tricky parts is trying to figure out the dollar value of your risk or profit while trading the Interest Rate markets.  We will use the US contract to show some examples.

Buying

Proximal  132’08

Target     132’27

Equals          ’19/32’s X $31.25 = $593.75 profit

What if your prices looked like this?

Proximal  132’08

Target      133’13

Now What  ???

A trick you can do is use handles and ticks to make this easier.  If we add 1 handle to 132’08 we get 133’08.  Now if we compare our target of 133’13 to 133’08 we only have a difference of 5/32’s.  The total point/tick value would be 1 handle and 5/32’s.    1 handle equals $1,000 and 5/32’s X $31.25 equals $156.25 for a grand total profit of $1,156.25.

Interest Rate markets take some getting used to just like any other market you are learning to trade.  But once you practice with this market it will become second nature to you.  Just like when you started trading Stocks and said “I will never get these calculations for Stock prices.”  You too will soon be calculating Interest Rate products in your head easily.

“The smallest deed is better than the greatest intention”  John Burroughs

–      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.