Posted by forex at 8:25 AM
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1. Open a brokerage account with a commodity broker. To trade futures or options on futures you must have an account with a broker registered with the Commodity Futures Trading Commission. Commodity brokers are usually different from stock brokers, however, many major stock brokers can act as an introducing agent to set up a futures trading account. Set up a futures trading account and fund it.
2. Study the broker's online futures pricing information for both the eurodollar futures and the associated options. There is a wide range of option expiration dates to match the expiration of different contracts and the issue of Treasury bills.
3. When you have forecast an increase in short term interest rates, select a eurodollar put option with an expiration date after your forecast rate change. Put options are available in a range of strike prices. The option is in-the-money if the futures price is below the strike price of the option. Out-of-the-money options are cheaper, but interest rates must move farther before they are in a profit position.
4. Select the put option contract you want to buy. At the money options offer the best opportunity for a profitable move at a reasonable price.
5. Determine the number of contracts to buy. As an example, assume the cost of a 3-month at-the-money put option was $106.25. Each basis point or 1/100th of a percent increase in the eurodollar interest rate will increase the contract value by $25. If interest rates increase one percent before the put option expires the profit will be $2,500 per contract.
6. Using the broker's online order system, place the order for the put contracts you want to own. When the order fills, confirm the number of contracts, expiration date and the price.
7. Monitor the eurodollar futures price. Be ready to sell your options contracts when interest rates have moved to the level you predicted. As the contract expiration approaches be ready to sell at a loss if necessary.