I am missing some intuition on the above subject. Say I am long CTD basis (I.e. short futures):

  1. I may opt to hold onto my position till last delivery for many reasons, say switch, wildcard etc. Why would I ever opt to make delivery though? At some point even if there is negligible optionality am I not nearly always better off closing my position ? (Assuming there is reasonable demand for the ctd outside delivering).

  2. Now say, I am just outright short. I can either make delivery or roll my futures trades. To weigh up which is better I'd effectively compare:

A. My financing costs of buying ctd and delivering into the contract. Vs. B. Buying the roll.

Is this a legitimate comparison?

Basically, I think what I am missing is the linkage between rolls and financing. Or I may just be totally off piste.

Appreciate the help.

  • $\begingroup$ If you close out the future and sell the bond you have 2 transaction costs, if you go to delivery you don't. And with the delivery just a few days away the futures market is not very liquid, the active traders have switched to the new contract. $\endgroup$
    – nbbo2
    Commented Oct 14, 2023 at 17:05
  • $\begingroup$ Assume this is answering part 1. If so, I agree. But..is that it? In fact if I am going to make a bond delivery because of the harsh exchange penalties on not delivering I would usually need the bonds in the box a couple of days before delivery anyway therefore financing above gc..I would have thought that is very sizable relative to transaction costs (unless you're assuming the future is v illiquid as everyone has rolled to next contract)? $\endgroup$
    – user68819
    Commented Oct 14, 2023 at 17:06
  • $\begingroup$ OK yes that's what I thought. Sorry its not letting me edit my comment now. $\endgroup$
    – user68819
    Commented Oct 14, 2023 at 17:07
  • 1
    $\begingroup$ I'll state another problem which I have encountered. When the ctd in the next future is different from the current. Outside of delivering bid/offer widens materially. $\endgroup$
    – user68819
    Commented Oct 14, 2023 at 19:21
  • $\begingroup$ I guess my part 2. Maybe a bit confusing or not well written. I'll try restate.. if I am short futures, how should I compare my option of either delivering or rolling. Ofcourse sometimes I may want to try buy the ctd to deliver, but will not be able to in which case I would have to roll. But outside of this friction..would my main consideration be the IRR of the roll versus the actual repo to the next delivery? $\endgroup$
    – user68819
    Commented Oct 16, 2023 at 7:01


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