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Eurodollar Futures
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Eurodollar Futures

  #1 (permalink)
Trading for Fun
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Eurodollar Futures

Hi, I'm new to futures and read that the Eurodollar is a good instrument to start with as it has low margins and volatility but good volume.

Is there anyone here who trades this product and, if so, do you have any tips for a person new to this product?

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  #2 (permalink)
Market Wizard
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Margin is generally a function of contract size and volatility, so it does follow that low margin and low volatility come together. In case you didn't know a Eurodollar contract represents a $1,000,000 3 month interbank loan. So the prompt month contract represents a loan that starts in the next few weeks. Since spot interest rates don't move that much the value of that contract doesn't move much either. EDZ9 on the other hand represents a loan starting in December which is ten months away. The spot rate in 10 months could be quite different than today. As such the EDZ9 contract is more volatile than EDH9. Hence it follows that margin rates increase with tenor of the underlying contract, which is the opposite of most commodity markets. (See CME Margin Rates here). I don't actively trade Eurodollars, I have traded some Eurodollar butterflys when the opportunity arises though. Eurodollars (mostly) trade in MAR/JUN/SEP/DEC cycle. Hence I gather it's quite common that people will trade a deferred contract in the cycle, for example the 4th contract, which right now would be MAR20.

Not sure if this guy is still updating this site, but it had a lot of interesting Eurodollar analysis
https://www.curveadvisor.com/

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  #3 (permalink)
Trading for Fun
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SMCJB View Post
Margin is generally a function of contract size and volatility, so it does follow that low margin and low volatility come together. In case you didn't know a Eurodollar contract represents a $1,000,000 3 month interbank loan. So the prompt month contract represents a loan that starts in the next few weeks. Since spot interest rates don't move that much the value of that contract doesn't move much either. EDZ9 on the other hand represents a loan starting in December which is ten months away. The spot rate in 10 months could be quite different than today. As such the EDZ9 contract is more volatile than EDH9. Hence it follows that margin rates increase with tenor of the underlying contract, which is the opposite of most commodity markets. (See CME Margin Rates here). I don't actively trade Eurodollars, I have traded some Eurodollar butterflys when the opportunity arises though. Eurodollars (mostly) trade in MAR/JUN/SEP/DEC cycle. Hence I gather it's quite common that people will trade a deferred contract in the cycle, for example the 4th contract, which right now would be MAR20.

Not sure if this guy is still updating this site, but it had a lot of interesting Eurodollar analysis
https://www.curveadvisor.com/

Thanks, this is a fantastic post, great info and really appreciate it! Would you say then that the Eurodollar is an instrument beginners should stay away from?

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  #4 (permalink)
Market Wizard
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I wouldn't necessarily say 'stay away', it really depends upon what you are looking for. It is a MASSIVE market though. Volumes on the Bid and Ask are in the 10,000s of contracts and it's average daily volume and open interest dwarf any other CME contract.

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  #5 (permalink)
Elite Member
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Favorite Futures: (May 17, 2019): /MESM9 - current expectancy = (10.6964 * 0.6914) - (9.2400 * 0.3086) = 4.5440 ticks
 
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SMCJB View Post
Margin is generally a function of contract size and volatility, so it does follow that low margin and low volatility come together. In case you didn't know a Eurodollar contract represents a $1,000,000 3 month interbank loan. So the prompt month contract represents a loan that starts in the next few weeks. Since spot interest rates don't move that much the value of that contract doesn't move much either. EDZ9 on the other hand represents a loan starting in December which is ten months away. The spot rate in 10 months could be quite different than today. As such the EDZ9 contract is more volatile than EDH9. Hence it follows that margin rates increase with tenor of the underlying contract, which is the opposite of most commodity markets. (See CME Margin Rates here). I don't actively trade Eurodollars, I have traded some Eurodollar butterflys when the opportunity arises though. Eurodollars (mostly) trade in MAR/JUN/SEP/DEC cycle. Hence I gather it's quite common that people will trade a deferred contract in the cycle, for example the 4th contract, which right now would be MAR20.

Not sure if this guy is still updating this site, but it had a lot of interesting Eurodollar analysis
https://www.curveadvisor.com/

Great post, I was confused by a couple aspects of eurodollar futures and you partly answered them.
1) Why backmonth eurodollar futures like GEZ9 get higher volume than frontmonths (you kind of answered this above, a loan starting in 10-12 months is more "interesting" than a loan starting today for multiple reasons.
2) What am I missing about this massive volume? A quick glance at cme globex data shows 346,771 contracts traded for /GEZ9 (backmonth eurodollars) and only 202,844 contracts for /GEH9 (frontmonth). Yet you've mentioned it and someone either on this site or somewhere else said when they worked for a prop firm they would try to jam orders for millions of these backmonth /GE contracts hoping to just get filled on a couple hundred-thousand. Why am I seeing such low numbers on the actual cme stats then?
3) I don't understand the price movement but I need to dedicate actual time to that and its on my todo list. It seems like watching paint dry yet they seem very popular so I know I have a lot to learn and I'm intrigued.

Thanks!


Last edited by snax; March 9th, 2019 at 07:01 PM. Reason: Fixed contract name from /ESH9 to /GEH9
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  #6 (permalink)
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snax View Post
2) What am I missing about this massive volume? A quick glance at cme globex data shows 346,771 contracts traded for /GEZ9 (backmonth eurodollars) and only 202,844 contracts for /ESH9 (frontmonth). Yet you've mentioned it and someone either on this site or somewhere else said when they worked for a prop firm they would try to jam orders for millions of these backmonth /GE contracts hoping to just get filled on a couple hundred-thousand. Why am I seeing such low numbers on the actual cme stats then?

Eurodollar matching engine is basically* pro-rata not FIFO. So everybody is incented to show more size than they need so they get bigger fills in the pro-ration!

* It's actually allocation which I believe fills the first order in the book 100% and then pro-rata's everything else.
https://www.cmegroup.com/confluence/display/EPICSANDBOX/Supported+Matching+Algorithms#SupportedMatchingAlgorithms-Allocation

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  #7 (permalink)
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Favorite Futures: (May 17, 2019): /MESM9 - current expectancy = (10.6964 * 0.6914) - (9.2400 * 0.3086) = 4.5440 ticks
 
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Oh interesting, thanks for the explanation and the link!

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  #8 (permalink)
Elite Member
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Favorite Futures: (May 17, 2019): /MESM9 - current expectancy = (10.6964 * 0.6914) - (9.2400 * 0.3086) = 4.5440 ticks
 
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Just as a follow-up, I didn't realize the average daily volume was for all the expiration months total. I have been used to contracts where almost all of the volume is in a single expiration month like /ES, /NQ, (with some cross-over around the rollover time) etc.

Once you sum all the volumes for the different expiration months it indeed comes out to be well over 2 million contracts per day.

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  #9 (permalink)
Market Wizard
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Equities (ES, NQ, RTY, EMD), Currencies (6A, 6B, 6C, 6E, 6J) & Treasuries (ZB, ZN, TN, UB) have all their volume in the prompt month.
Energies (CL, NG, HO, RB), Metals (GC, HG, PA, PL, SI), Meats (GF, HE, LE), Ags (ZC, ZL, ZM, ZS, ZW) & Eurodollars all have active forward curves with Eurodollars the most active and crude the second most active.

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  #10 (permalink)
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It's always struck me how the more retail forums don't go into much depth on the STIR complex but it seems like everyone who claims to be a prop guy on twitter trades this stuff, maybe it's just too slow to be interesting for most.

I've been playing around with timing Eurodollar trades by watching fed funds and other rate benchmarks like 10yr yield. A recent example would be the the dip on March 26th. Nov 19 Fed Funds found support on 97.75(2.25%) which is the lower bound of the fed's target range, a fundamentally important price, and the bid rippled across the whole complex to a certain degree(the Dec 19 Eurodollars are shown in blue to illustrate my point). Anybody else trading rates like this? Finding fundamental prices and using them as SR?

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Last edited by CSC1; March 28th, 2019 at 10:04 PM.
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