Jayanthi Gopalakrishnan is not a representative
of TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
Futures and futures option trading is speculative and is not suitable for all investors. Please read
the Risk Disclosure for Futures and Options prior
to trading futures products. Futures accounts are
not protected by the Securities Investor Protection Corporation (SIPC). Futures and futures options trading services provided by TD Ameritrade
Futures & Forex LLC. Trading privileges subject to
review and approval. Not all clients will qualify.
For more information on the risks of trading and
futures, please see page 37, #1 & 3.
FIGURE 3: Watch bond prices move. Here you see how /ZB moved between March 20, 2018, to April 3, 2018.
For illustrative purposes only.
to put up that entire amount. Instead, you
put up a marginal amount, known as the
initial margin requirement.
Many traders are drawn to trading
futures because of leverage—the ability to
commit a small amount of capital to control a large position. And that means small
changes in an underlying future’s price
could turn into large gains or losses. As
with all financial instruments, it’s worth
putting in the time to understand how
margin and leverage work.
Leverage for futures is different than for
stocks. Many traders will let cash-settled
futures settle to cash. For physically settled contracts, such as crude oil
(/CL), a trader must be out of the position
before the settlement date or else a broker like TD Ameritrade, which doesn’t
allow physical delivery, will trade out of
the contract for you. Futures traders open
and close positions before a contract’s
settlement date, so they don’t need the
contract’s full value in order to trade.
(See Figure 2 for an illustration of a bond
future’s margin mechanics.) Keep in
mind: margin requirements are subject to
change. So check with the exchange, and/
or your broker, before you trade.
For $2,700 you’re getting exposure to
$100,000 of the 30-year Treasury bond.
Now that you know how bonds are priced
and how margin works, take a look at
Figure 3 to see an example of day-to-day
action in bond prices. Calculating P/L is
simple math. Say you buy one/ZB contract
at 143’ 26 and sell one /ZB at 144’ 28. Your
profit would be $1,062.50. On your thinkor-
swim platform, head over to the Analyze
Underlying & P/L
Graph. Go back in
time to see how
bonds move. With
initial capital of
$2,700, it’s possible
BIG DOESN’ T HAVE TO BE SCARY
to trade bond fu-
tures and potential-
ly earn a profit. But remember, things could
go the other way. Which is why you should
have a risk management strategy in place
to prevent your account value from drop-
ping below its maintenance margin.
Some may think bonds are complex, scary
financial instruments that should be
avoided. In point of fact, you don’t always
need a huge capital outlay to trade bond
futures—just a strong understanding of the
pricing dynamics. And make sure you’re
prudent about your trading account.
Get to know bonds in your paperMoney®
account. The reality may surprise you.
Coupon or interest rate The interest that’s due and the date it needs
to be paid.
Face value (or par) The actual value of the bond, i.e., principal, maturity,
or value. Not the market value.
Handle A full-point price movement.
For /ZB, this would be $1,000.
Initial margin The amount you
need in your trading account to
enter the trade.
Maintenance margin The amount
you must maintain in your account at
the close of trading to hold a futures
Maturity date The date the bond’s
principal amount is due and paid.
Yield Annual percentage rate of
return earned from the bond.
TO DAY PRICE
Go back in time
and explore how
move using the
10-DAY BOND TRADE