People new to Eurodollar futures may not be aware of the various possibilities in trades that are available. Even people who have traded EDs for a while don’t think about all the possibilities. EDs aren’t like other futures, like gold or orange juice. You can actually do a lot more with them than most people realize.  Below are many of the things you can do with EDs, and let’s say you wanted to take a bearish interest rate view:

 

  1. Trade Directionally. Sell a single contract (i.e. sell EDZ7).
  2. Trade Spread. Buy a calendar spread in the front of the curve, if you think the curve steepens on a selloff (i.e. buy EDM7-M8 spread). You can also sell a calendar spread in the back of the curve if you think the long end of the curve flattens on a selloff (i.e. sell EDZ8-Z0 spread)
  3. Trade Curvature. Buy a butterfly near the front of the curve (i.e buy EDZ6-Z7-Z8 fly). You can trade weighted or unweighted butterflies.  You can also trade any width spread vs any other width spread, in any ratio.
  4. Trade Double Flies. You can also trade double butterflies (buy EDM7-M8-M9 fly vs sell EDM8-M9-M0 fly).
  5. Trade ED vs FF. You can express a view on how the spreads change in response to a selloff, or to express a specific meeting view.
  6. Trade ED vs other STIR futures. Sometimes, your view makes more sense vs another country.
  7. Trade ED vs swaps (convexity trades).
  8. Trade ED vs treasury futures or cash.
  9. Any of the above, using options.
  10. And the entire universe of trades you can do using just options (flies, risk reversals, etc).

 

So the next time you are stuck for trade ideas, think about the above. And I’m probably missing a bunch of other trade alternatives.  The main point is, each of the dozens of structures you can consider to take a bearish rates position can be analyzed for profit potential on the upside, and compared with loss potential on the downside, AND carry or roll potential.