betting on fed funds futures

Discussion in 'Trading' started by bestfriend, Jun 6, 2006.

  1. Can someone please explain to me how to bet that the fed will not raise rates at the next meeting? I see there are CBOT contracts on fed funds but I don't understand the pricing when I looked at it on IB? Is it tradeable on IB?
  2. you would buy July Fed funds which at 94.795 are reflecting about an 80% chance that the Fed tightens at the June meeting. If they do not, the contract should rally approximately 20 ticks. Symbol on IB is ZQ. Good luck.
  3. Sorry, price like this. 100 - 94.800 = 20 bp. Pricing a 5.20% funds rate from current 5.00%, in other words, 80% of the way towards fully pricing a 25 bp hike.
  4. All you can do is bet on how the markets will react to the Federal Reserve's actions or inactions. If you want to bet that one minute after the Fed's meeting, fedfund futures will jump up dramatically, you can go long fedfund futures. If you want to bet that fedfund futures will jump down, you can go short.

    Or, if you want to be tricky, you can buy straddles of options-on-futures. You can buy an at-the-money call and simultaneously buy an at-the-money put. This is a bet that the fedfunds futures market will make a large sized move in EITHER direction, up OR down, and if it's big enough, you make money.

    If you want to bet that the fedfunds futures market will NOT make a large sized move in either direction, you can sell options straddles (rather than buying them). But this is a tricky play with sophisticated margin requirements and very VERY large risks if things go wrong.
  5. Thanks Rhymes, but I am still confused. If I want to bet they are NOT going to raise wouldn't I sell the ZQ's? is 100-94.80 =20 bps a true statement?
  6. ok, 100 is the index price, so take the futures price and subtract, in this case, the contract is reflecting a 5.20% rate. 100 - 94.80. At 94.80, the contract is reflecting a 5.20% average funds rate for the month after the June meeting. The current rate is 5.00%. So the futures contract is pricing in 20 of a possible 25 bp hike. If they did not hike, the contract should close around 95.00, a 5% rate. (100 - 95.00 = 5.00%). Does that help?
  7. Put it this way, on the weak payroll print, July Fed funds jumped from 94.83 (5.17% or 68% odds of a hike) to 94.900 (5.10 or 40% chance for a hike. After Bernanke's hawkish comments yesterday and Poole's this morning, the contract has fallen from 94.900 (approximatley) to 94.790 (5.21% or 80%+ for a 25 bp hike).
  8. trading the Fed funds futures is a pure, direct bet on where the Fed will be after they meet next, especially the July contract as there is no meeting in July and the June meeting is at the end of the month of June.