Last Revised: 09/19/2023

Applied Futures & Options on Futures

Segments Page

Equity Futures with ES 2

Treasury Futures 8

Treasury Basis Trade 14

M.M132743897.

This document should be used in conjunction with the corresponding segments for the 2023 Applied Futures & Options on
Futures section as provided on MarkMeldrum.com. All content is copyright 2023. All rights reserved.

© markmeldrum.com. All rights reserved.

1
 Last Revised: 09/19/2023

Equity Futures
Page 1/
interest rate (continuously compounded)
F0(T) = S0e(r-q)T
dividend yield of index (cc)
spot index
futures price
price time in years
at time T
(or cash price)

days to exp.
- more simply: Cash [ 1 + r !𝐱&𝟑𝟔𝟎'] - Dividends
(Fair Value) (to exp.)
spot
or theoretical [Cash × Div. yield]"𝐱'𝟑𝟔𝟎(
price
price

- when cash market is not open, F0(T) can trade above or

below the fair value (supply/demand forces)
- once cash market opens, arbitrage brings both into
alignment

Page 2/

- if r > div. yield , futures curve is upward sloping

- the greater (r - div. y) , the steeper the curve
carry
upward sloping downward sloping
long ➞ negative carry positive carry
short ➞ positive carry negative carry

upward sloping - neg. carry for long positions

+ 3 Decembers
M.M132743897. D27
listed for 9 consecutive
quarters D26
M25 D25
D24
S24
J24
M24 get progressively more illiquid
D23
S23
J23
M23

2
 Last Revised: 09/19/2023

Page 3/
Carry/

.25
Jun. 16 carry increment
Mar. 17 carry 4141.25 .75 (tight)
spread
4104.50 4094.65
(lower liquidity)
- 4094.65 46.60
9.85 - index value

Mar. 17: Cash × (r - divs.) 𝟑𝟔$𝟑𝟔𝟎 Jun. 16: Cash × (r - divs.)𝟏𝟐𝟕'𝟑𝟔𝟎

Page 4/

Jun. exp. index up 46.6 pts.

4141.25 4141.25 long = no
futures unch.
gain
short = no
(+10.50) loss
long position earns 9.85 less
4104.50 4115 (+20.35) short position loses 9.85 less

4094.65 index down 24.65 pts.

4070
futures down 34.50 pts. (9.85 more)
Mar. 17 Jun. 16

F0(T) = Cash[1 + r(𝟎'𝟑𝟔𝟎)] - Dividends carry decay

[r(𝟏'𝟑𝟔𝟎) - next day’s

]
M.M132743897.

0 0 divs.
F0(T) = Cash × Cash

nearly linear

3
 Last Revised: 09/19/2023

Page 5/
ES/ e-mini 50× Index e.g. index = 4000
ES notional = 4000 × 50 = 200k
- each point = 50 USD
- trades in increments of .25 (12.50 USD per tick)
- cash settled
daily MTM - gains and losses realized every day

- listed quarterly ➞ Mar./Jun./Sep./Dec.

- 9 consecutive qtrs. + 3 more Dec.
- trading stops at 9:30 am on 3rd Friday of
the listed month
Margin: 10,600 USD ~ 5% of notional value (20× leverage)
MES - micro S&P = 𝟏$𝟏𝟎 ES - each point = 5 USD
margin = 1,060 USD
ES - trades almost 24-hrs. on Globex (ex. 5:00 - 6:00pm ET)

Page 6/

ES/ e-mini vs. SPY - higher leverage (lower margin)

- no mgmt. fee
- no borrow fee for short positions
Use/ - trades ~ 23 hrs. + options
1/ Directional bet
- long 𝜷 ➞ neg. carry Index @ 4094.65
𝛃=1
- short 𝜷 ➞ pos. carry ES
C ash diversified @
5% 204,732
2/ Equitize Cash - long ES market return low cost MES
20,473
long T-Bill - (r - div. y) + r = + div. y
95% Cash
M.M132743897.

3/ Hedge portfolio risk - long $∆𝛃 in portfolio ➞ ∆price + div.

- short ES ➞ pos. carry reduces this
- lowers $∆𝜷 only

$∆𝛃 = 0 ➞ div. y on portfolio + carry

4
 Last Revised: 09/19/2023

Page 7/
Options/ - available for both ES/MES
- trade 23 hrs. on GLOBEX
- quarterly options - Mar./Jun./Sep./Dec. months (American)
- 3rd Friday exp. @ 9:30am ET (settles into expiring contract)
- serial options - 2 months prior - e.g.: in Dec. ➞ Jan./Feb. listed (American)
- 3rd Friday of contract month @ 4:15 ET
underlying ➞ ES/MES futures contract for nearest expiration
- all others (weekly, end-of-month) - European (4:00 ET exp. day)
- Strikes > 365 days 100 point increments 1.3 Cash ➞ .2 Cash
126 < d < 365 50 point increments added 1.15 Cash ➞ .60 Cash
96 < d < 126 25 point increments added 1.1 Cash ➞ .75 Cash
10 < d < 96 10 point increments added 1.1 Cash ➞ .80 Cash
d < 10 5 point increments added 1.05 Cash ➞ .9 Cash

Page 8/

Options/ ES ➞ every option point = 50 USD (5 USD for MES)

- option strikes centered around nearest futures month,
not the spot (cash) index price
e.g./ up to Mar. 17 - listed options underlying = March ES
(Fri.)
- ATM = March ES price
Mar. 20 - Jun. 16 - underlying = June ES
(Mon.) (Fri.)
- ATM = Jun. ES price
JUN. ES 03/20
4136
vs.
∆ = .50 SPY ∆ = .50
Mar. ES ∆ = .50 06/16
4099.50 4150 pM.M132743897.

( )
03/17 ∆ = .493 412 p
4090.49 03/20
185.50 408.20 ∆ = .495
Index 03/17 18.25
(9275)
(9129)
Mar. 17 03/20 04/28 05/31 06/16

Mar. 31 4140p ∆ = .497 117 (5850) Mar. 31 409p ∆ = .494 11.64 (5820)

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 Last Revised: 09/19/2023

Page 9/
Options/ margin req.
500 SPY ~ 1 ES
Jun. ES 18,364 CAD
short 4150 p
16,853 CAD Short 5 412 p on SPY - Jun. 16 exp.
Jun. 16 exp.
∆ = .495
186 × 50 = 9300 USD (18.25/sh. × 100 × 5) = 9125 USD
(∆ = .493) premium premium

margin req. = 93,853 CAD

for more efficient use of same exposure
capital same $ return ES > 4150 (SPY ~ 412)

16,853 Cash gain 9300 gain 9125

77,270 4-mos. T-Bill or

90-day BA
➞ 1,259 CAD interest

Page 10/
Small Accounts/ $2500 - $5000
MES margin 1836 CAD SPY cost 27,217 CAD
(micro S&P) (50 sh.)

Options/ Sell 1 3600p ∆ = .153 Jun. 16 exp. (125d)

premium: $52 × 5 = 260 USD ➞ 346.89 CAD
margin: $1,316 CAD 𝟑𝟔𝟓
26.36% × + '𝟏𝟐𝟓. = 76.97% ann.

Sell 1 3600p ∆ = .101 Apr. 21 exp. (69d)

premium: $24 × 5 = 120 USD ➞ 160.10 CAD
margin: 1330 CAD
12.03% × +𝟑𝟔𝟓'𝟔𝟗. = 63.63% ann.
M.M132743897.
Sell 1 3550p ∆ = .086 both Apr. 21 exp. (69d)
1 4530 c
premium: 30.75 × 5 = 153.75 ➞ 205.57 CAD
margin: 1281 CAD 16.04% × +𝟑𝟔𝟓' 𝟔𝟗. = 84.85%

3k in MM-ETF @ 4% , 2K cash ➞ 120 income, 423 cap. g , 𝟓𝟒𝟑&𝟓𝐤 = 10.86%

(50%)

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 Last Revised: 09/19/2023

Page 11/
Others/
(CAD)
Ticker Name Multiplier Margin Options (ATMp) MAR.17 exp.
YM Dow e-mini 5 13,004 no volume 𝐩𝐫
$𝐦𝐠.
EMD e-mini S&P400 100 no volume (CAD)

SMC e-mini S&P600 100 no vol. no options

NQ e-mini NASDAQ 20 30,247 25,532 (7800 USD) .408
MNQ e-micro NASDAQ 2 3,025 2,511 (780 USD) .408
RTY e-mini Russell 2000 50 13,541 11,389 (2700 USD) .316
SPX S&P500 Index 100 × 94,104 (9900 USD) .140
∆ = .499
106,637 JUN. 16 .238
vs. (18,600 USD) ∆ = .493
ES e-mini S&P 500 50 18364 16853 Jun. 16
(9300 USD) ∆ = .493
- most liquid at all ×2 33706 .736
expirations and strikes (18,600 USD)
17,384 (4800 USD) .368

M.M132743897.

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 Last Revised: 09/19/2023

Treasury Futures
Page 1/
Ultra 10 yr. - TN (100k)
4 key rates - 2 yr., 5 yr., 10 yr., 30 yr. - Ultra 30 yr. - UB (100k)

ZT ZF ZN ZB

two five ten bonds

(200k) (100k) (100k) (100k)

- underlying = generic bond ➞ 2 yr. = 2,000 , 6% coupon par bond

5/10/30 = 1,000 , 6% coupon par bond
a specific bond
multiplier = 100
is identified for each contract
➞ F0 is calculated - futures price of the specific bond
➞ CF = conversion factor ➞ converts a specific bond to a
generic 6% par bond

∴ Quoted futures price = 𝐅𝟎'𝐂𝐅

(ZT, ZF, ZN, TN, ZB, UB)

Page 2/

- all physically settled - some brokers do not support physical delivery

- less than 5% lead to delivery
- delivery can occur any day during the delivery month
March/June/Sep./Dec.
- short position decides when and what to deliver
(long position has the obligation to accept delivery and pay)
- delivery is a 3-day event Intention Date - can
precede the first
first delivery date
allowable delivery date
intention date by 2 days
M.M132743897.

e.g./ March contract can

last day be assigned Feb. 27

to avoid
(IB will force close your
delivery
position Feb. 24)
notice date

8
 Last Revised: 09/19/2023

Page 3/

Intention Date ➞ CME assigns to oldest-dated long position still

open first
Notice Date ➞ short side declares what bond will be delivered
Delivery Date ➞ trade takes place (earliest date = 1st day of delivery
month)
- latest day = 2 days after delivery month
(2/5 only)
- Open Interest drops significantly on the day before Intention Date
(IB forces you to close or roll by 3rd bus. day before end-of-month)
- this pushes liquidity into the next contract
e.g. - Fri. Feb. 24 - last day to roll, OI for March ↓, June ↑
2023 (volume) ➞ liquidity ↑
∴ if rolling, wait for this date (bid/ask) ➞ spreads ↓

- this is not an issue for cash-settled futures, typical for all

physical settlement futures

Page 4/

Uses ➞ hedging interest rate risk ➞ price risk, not cash flow
➞ adjusting portfolio duration
➞ speculation
Contracts: the futures contract name (i.e., 2, 5, 10, 30) may not reflect
the maturity of the deliverable
- all trade Sun. 6:00pm ET - Fri. 5:00pm ET on GLOBEX
- 5:00pm - 6:00pm ET - maintenance period

ZT/ 2-year Note: $200,000 par size (100 × $2,000 bonds) @ 6% coupon
- underlying = UST Note
M.M132743897.
original term < 5 yrs. 3 mos.
remaining term > 1 yr. 9 mos., < 2 yrs.
𝐅(𝐙𝐓)𝟎 = (𝐅𝐂𝐓𝐃 + 𝐀𝐈)/𝐂𝐅
tick = 𝟏$𝟖 of 𝟏$𝟑𝟐 = 7.8125/tick . 𝟎𝟏'
𝟑𝟐 × 200K = 62.50
÷ 8 = 7.8125
- 3 consecutive months listed

9
 Last Revised: 09/19/2023

Page 5/

ZF/ 5-year Note: $100,000 par size (100 × $1,000 bonds) @ 6% coupon
- underlying = UST Note original term < 5 yrs. 3 mos.
remaining term > 4 yrs. 2 mos., < 5 yrs.
𝐅(𝐙𝐅)𝟎 = (𝐅𝐂𝐓𝐃 + 𝐀𝐈)/𝐂𝐅
tick = 𝟏$𝟒 of 𝟏$𝟑𝟐 = 7.8125/tick . 𝟎𝟏'
𝟑𝟐 × 100K = 31.25
÷ 4 = 7.8125
- 3 consecutive months listed
ZN/ 10-year Note: $100,000 par size (100 × $1,000 bonds) @ 6% coupon
- underlying = UST Note remaining term > 6.5 yrs., < 10 yrs.
𝐅(𝐙𝐍)𝟎 = (𝐅𝐂𝐓𝐃 + 𝐀𝐈)/𝐂𝐅

tick = 𝟏$𝟐 of 𝟏$𝟑𝟐 = 15.625 . 𝟎𝟏'

𝟑𝟐 × 100K = 31.25
÷ 2 = 15.625
- 3 consecutive months listed

TN/ Ultra 10-year Note remaining term > 9.5 yrs., < 10 yrs.

Page 6/

ZB/ 30-year Note: $100,000 par size (100 × $1,000 bonds) @ 6% coupon
- underlying = UST Note remaining term > 15 yrs., < 25 yrs.
𝐅(𝐙𝐁)𝟎 = (𝐅𝐂𝐓𝐃 + 𝐀𝐈)/𝐂𝐅
tick = 𝟏$𝟑𝟐 = 31.25/tick . 𝟎𝟏'
𝟑𝟐 × 100K = 31.25
- 3 consecutive months listed
UB/ Ultra 30-year Note: remaining term > 25 yrs.

Basis/ price spread between futures and CTD (cash)

cash priceCTD - (quoted futures price × CF)
(clean) M.M132743897.

- since contracts are closed/rolled 3rd bus. day prior to

contract (delivery) month, convergence does not occur
basis = carry + cost of delivering bond not covered in the price

10
 Last Revised: 09/19/2023

Page 7/

yield
F0(T)
downward sloping
upward sloping
futures curve
YC
front
futures are at month
a discount to
cash
maturity

- borrow at the overnight rate ➞ repo rate (~ EFFR)

- buy the bond at a higher yield ∴
downward sloping
e (r-q)T T ≤ .75 (3 consecutive months) curve, repo rate > bond
yield
r < q , ∴ r - q < 0 , (r - q)T < 0 , e-x < 1
- upward sloping futures
F0 = S0e-x ➞ F0 < S0 curve
ZN: March 111 ’ 255 (L)
Net Basis = Basis - carry ➞ lowest = CTD June 112 ’ 085 (L)
Sep. 112 , 310 (NL)

Page 8/

Implied Repo Rate

yield ➞ long cash bond ➞ lend in repo market
short futures
- the bond that produces the highest yield = CTD
= bond with lowest net basis
Options on Futures/ - last expiration for a contract month is the
Friday before Intention Date
American
- exercised into e.g. Feb. 24 ➞ underlying = Mar. contract - if last roll date,
nearest futures forced closed by IB
contract
Mar. 01 ➞ underlying jumps to June contact
(except last M.M132743897. last options trading day
roll date) May 26
- options centered around futures price
(i.e. ∆ = .50)
➞ March 1 options centered around June futures price, not March

11
 Last Revised: 09/19/2023

Page 9/
CME - Treasury Analytics - CTD, OTR, Strike as yield
CTD yield
Treasury Watch - Issuance, Auction, Fed BS, VOL.

Micro Treasury Yield Futures - quoted as yield - traded in yield

margin bid ask
- constant BPV 1437 will not
$10 2017 be CMT
958
- cash settled 1341 = OTR yield

tick size = .001 = $1

- listed 2 nearest contracts (requires rolling)
.01 = $10
- expire last day of trading month
multiplier = 1000
- curve trades: 10Y - 2YY = 3.8605 - 4.5065 = -.646

long + short = curve flattener (margin = 1207 CAD)

Page 10/

Risk/ Duration - first derivative = ModDur

P
- longer maturity bonds tend to have
convexity lower yield volatility but higher
(not linear)
price volatility
- for a 1bps change in yield
y %∆P ➞ ZB > ZN > ZF > ZT
BPV - basis point value ➞ ModDur × MV × .0001
(DV01) - the change in price of the CTD for ∆bps = 1
𝐁𝐏𝐕𝐂𝐓𝐃&
𝐂𝐅 = 𝐁𝐏𝐕𝐟
e.g./ Mar. 2023 ZN (as ofM.M132743897.
Feb. 21/2023) P = 111-19
2 - 20+
CTD DVO1f = 64.01 ModDur 5.7614
(6yr. 8mos.)
current yield = 3.95% -64.01 × 41 = -2,624.41
watch 7 yr. yield ∆ bps = +41
cycle high = 4.36% -5.7614 × .0041 = -2.36%

12
 Last Revised: 09/19/2023

Page 11/
Slope/ - change in slope trade requires duration neutral position

y. e.g./ 10y - 2y ~ -78 bp (using CMT yields, not OTR)

2y yield ↓ ➞ price ↑ ∴ long ZT ratio:

or 𝐃𝐕𝟎𝟏𝟏𝟎
'𝐃𝐕𝟎𝟏
10y yield ↑ ➞ price ↓ ∴ short ZN 𝟐

(or some
t.
combination)
using ZT/ZN
e.g./ DV0110 = 64.01
𝟔𝟒. 𝟎𝟏$
DV012 = 33.72 𝟑𝟑. 𝟕𝟐 = 1.898 ~ 2:1
(94.9%)
DV01U10 92.86 using ZT/TN
𝟗𝟐. 𝟖𝟔$
𝟑𝟑. 𝟕𝟐 = 2.75 ~ 3:1
TUT (2 ZT, - ZN) 10y-2y (91.67%)

NOB (2 ZN, - ZB) 30y-10yr.

M.M132743897.

13
 Last Revised: 09/19/2023

Treasury Basis Trade

Page 1
Review: UST Treasury futures ➞ generic 6% par bond
close contract before
➞ underlying called CTD this date to avoid
quoted delivery risk
𝒇 = 𝐅' CTD forward price Day 1 Day 2 Day 3
futures 𝐂𝐅
price position notice delivery
Short side chooses which bond to deliver date date date
(state (identify
1/ quality option ➞ which bond intent) bond) delivery
(a.k.a. delivery ➞ typically one CTD, but may change period
option) if yields are volatile (switch risk) begins

2/ timing option ➞ what day during the delivery period to make delivery
can deliver on any day during the deliver month
3/ wildcard option ➞ contract price fixes at 2:00 pm (invoice amount known)
➞ up to 8:00 pm to declare intent to deliver
if rates ↑ , 𝐏𝐂𝐓𝐃 ↓ - short earns the difference
4/ end-of-month option ➞ contract price fixes on last day
➞ still 5 days to declare intent - hold if coupon > repo
rate

Page 2
short side would be expected to pay for this optionality
∴ futures price will not quite be no-arbitrage
𝐅𝐂𝐓𝐃' zero-basis
𝐁𝐚𝐬𝐢𝐬𝐠 = 𝐏𝐂𝐓𝐃 - ( 𝐟 × CF) 𝐟= 𝐂𝐅 futures price
𝐁𝐚𝐬𝐢𝐬𝐧 = F - ( 𝐟 × CF)
with upward sloping YC,
rearrange 𝐟 × CF = F - 𝐛𝐚𝐬𝐢𝐬𝐧 𝐟 < 𝐏𝐂𝐓𝐃

𝐁𝐚𝐬𝐢𝐬𝐠 = 𝐏𝐂𝐓𝐃 - ( F - 𝐛𝐚𝐬𝐢𝐬𝐧 ) CTD yield

repo
𝐁𝐚𝐬𝐢𝐬𝐠 = 𝐏𝐂𝐓𝐃 - F + 𝐛𝐚𝐬𝐢𝐬𝐧 M.M132743897. rate (cost of
carry)
carry optionality
since prices converge
at expiration, returns
if 𝐁𝐚𝐬𝐢𝐬𝐠 > carry ⇒ 𝐁𝐚𝐬𝐢𝐬𝐧 > 0
are basically guaranteed
(a.k.a. BNOC)

14
 Last Revised: 09/19/2023

Page 3
- basis trade - one of the most popular fixed-income RV strategies
- commonly with 𝐔𝐒𝐓𝟐 or 𝐔𝐒𝐓𝟓

long basis trade: 3 markets

UST
futures sell 𝐟
cash market
market HF
cash
cash - UST
haircut long CTD, financed in
repo repo market, short futures
2%
market
∴ leverage = 50:1 ➞ when BNOC > 0
(𝐛𝐚𝐬𝐢𝐬𝐧 )

- since BNOC represents pure optionality, a basis trade is NOT

arbitrage
- if BNOC < 0, that would be arbitrage (more like yield
enhancement)

Page 4

long the basis is basically being long options (which is also a long
if yield vol. is low, CTD would likely not change volatility play)
∴ quality option would be low (low rates, flat curve,
quality option ≈ 0)
➞ volatility: CFs are set based on pricing to the first day of the
quarterly contract month and are then fixed
- if yields < 6%, CF favors low D, high coupon bonds
- if yields > 6%, CF favors high D, low coupon bonds
- as rates ↑ , CTD with highest D drops the most
- as rates ↓ , CTD with lowest D rises the least

vol. inM.M132743897.
rates may cause the CTD to change
quality option value ↑
when BNOC > 0, long the basis trade
or/ 𝐈𝐧𝐯. 𝐏 𝟑𝟔𝟎
𝐈𝐑𝐑 = 7 − 𝟏B ×
when implied repo rate > actual repo rate 𝐏𝐮𝐫𝐜𝐡. 𝐏 𝐧
(rate at which basis trade profit = 0)

15
 Last Revised: 09/19/2023

Page 5

Risks: 1/ Rollover risk

one day repo rate < term repo

risk of rising rates (higher funding cost)

𝐏𝐂𝐓𝐃 ↓ , repo dealer needs more collateral
2/ variation margin
rates ↓ , 𝐏𝐂𝐓𝐃 ↑ ➞ short futures ∴ more margin
may be required
higher 𝐏𝐂𝐓𝐃 , repo cash ↑ generally

- in times of illiquidity, 𝐏𝐂𝐓𝐃 and 𝐟 can diverge

at 50× leverage, small changes in margin
requirements or cost of financing could lead to
large cash outlays

M.M132743897.

16