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Trading Eurodollar Futures

Updated on August 17, 2010

Trading Eurodollar Futures

I can’t lie—trading Eurodollar futures has never really been my cup of tea, but it’s mainly because I like to trade what I believe to be more tangible, physical commodities such as the Grains or the Softs. Now I’m not against the Eurodollar (and what idiot ever would be), and I have many times purchased Eurodollar options when things were looking ripe on the Eurodollar’s price chart, but overall I haven’t focused a lot on trading Eurodollar futures, or basically any other futures contract that’s based on an interest rate (like the LIBOR or T-Bonds), because I know how herky-jerky those types of markets can be, plus the fact that they are so subject to geopolitical turbulence that it’s hard (in my mind anyway) to keep up with all of the factors that drive their price movements. But I will say this: Eurodollars are a HUGE market, so I can’t take anything away from them. For those who may not be fully schooled in what Eurodollars are, they’re basically a U.S. Dollar held in some type of European bank, or at least that’s what I’ve been told. The derivatives game is so shady that it’s hard to tell if any of this is even legitimate, but at the end of the day, as long as you’re long when prices go up or short when prices go down, you can exit the markets a happy camper and worry about the details later.

Image courtesy of Google Images
Image courtesy of Google Images

Eurodollar Futures Trading

Anyway the Eurodollar futures contract represents a principal deposit of $1,000,000 U.S. Dollars with a three-month maturity. The point value is somewhat confusing, but to hopefully simplify it, if the price moves up one basis point ($0.01), you’ve just made $25.00. Conversely, if the price moves down one basis point, you’ve just lost $25.00. Again, I like to keep things simple, as you may have been able to tell by now. It trades in only four contract months out of the year (March, June, September and December), and it is traded on the CME Group Exchange (used to be called the “Merc”—and I still call it that). As I said before, I’m not the biggest Eurodollar fan by a long shot, because it seems to be a little “boring”—superficial, I know. But one thing is for sure…if you are an interest rate buff, or if you just love hanging on Bernanke’s every word regarding interest rates, then you might find some comfort and excitement in trading Eurodollar futures. The market is quite reactionary to geopolitical news, so if you have a directional slant on the markets and would like to enter them without incurring too much risk, I would say that maybe Eurodollar options would be a safe bet, as you can actually scoop up some cheap out-of-the-money Eurodollar options for as little as $6.25 (one-fourth of a point). I have done this, and it can be profitable, but again, it’s hard for me to see interest rate futures being much more than a crap shoot for a short-term trader. I would probably use a longer-term trend following strategy with Eurodollars. Am I rambling? I think so, but these are just my thoughts on trading Eurodollar futures.


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