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Futures Spread - Contract There is a Futures Spread, Where the Margin reflects a Leverage of 3 to 1 ,

The Margin for the contract is just $ 210.

I ‘am Buying “ 1 Futures Contract September, Selling 1 Futures Contract December ”

It is a Interest Rate Futures Contract,

There is a Spread of 0.25 % , between the two contracts,

The Bought Leg of the September Futures Contract = 1.00 % The Sold Leg of the December Futures Contract = 1.25 %

Spread = 0.25 % ,

The Contract has it where a 0.25 % change = $ 625 Dollars in Gain/Loss , in other words a 25 basis point change = $ 625 Dollars in Gain/Loss

Target Profit With this expected target of a + 25 basis point gain, I want to target a Total of $ 30,000 Profit. In order to do to do this, i would need to to have 48 Contracts ($ 30,000 / 625 = 48 Contracts. This would be 48 Contracts on the Buy Side Leg, and 48 Contracts on the Sell Side Leg. ) .

Spread Narrowing - Profit Gain I’am expecting the December Futures Contract will decrease to the same level as the September Futures Contract, so both will decrease to the level of 0.75 % . This would give me 0.25 % Gain on the December Contract ( Sept Contract -.50 , December Contract +.75 , Total = -0.50 + 0.75 = 0.25 ) .In other words a + 25 Basis Point Gain is realized , which would be a + $ 625 Profit Gain. With 48 Contracts, This in Total Profit would equal $ 30,000 ($ 625 x 48 Contracts).

Spread Widening - Loss Now to the flipside scenario where i have a Loss, lets say the Interest Rate for the December Contract increased more than September Contract, the December Contract increased to 1.75 %, and the September Contract increased to 1.25 %, this gives a spread of 0.50 % . This would result in a -0.25 % loss in the Futures Spread, ( Sept Contract + 0.25 Gain, December Contract -0.50 Loss, Total = 0.25 - .50 = - 0.25 ). In other words, a - 25 Basis Point Loss is realized, which would be a - $ 625 Loss. With 48 Contracts, this would be a Total Loss of - $ 30,000 ( - $ 625 x 48 ) .

Risk to Reward Ratio Right now by doing this spread, it seems like there is a Risk to Reward Ratio of 1 to 1, a potential Risk of Loss of - $ 30,000 and a Potential Gain of + $ 30,000 .

I want to have a risk to reward ratio of 1 to 3 in this Futures Spread. I want the potential Loss to be limited to $ 10,000 and the Potential Gain to be the same as it is now at $ 30,000.

I want to implement this 1 to 3 Risk to Reward ratio with this Futures Spread without using Stop Loss Order. How can I structure this Futures Spread to have this 1 to 3 Risk to Reward Ratio ?

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  • $\begingroup$ There are a few important details missing here...can you collateralise the account then withdraw cash (I'd guess not)? $\endgroup$
    – user68819
    Commented Jun 11 at 18:30
  • $\begingroup$ thanks for you response, what do you mean by Collateralize the account ? What do you mean by withdraw the cash ? what effect would withdrawing the cash have ? $\endgroup$
    – Calculate
    Commented Jun 12 at 5:33
  • $\begingroup$ Collateralise the account means what margin you put in versus the trade, I.e. what the platform requires you to initiate the trade. If you with draw cash after initiating the trade and the size is fixed, then effectively you're moving the level at which the exchange will close your position closer (but not all platforms allow this.. in fact I'm not even certain any do anymore). $\endgroup$
    – user68819
    Commented Jun 12 at 6:30
  • $\begingroup$ I stated the Margin above, it is about a leverage of 3 to 1. the Initial Margin for the Spread is around $ 210 dollars. I assume when you say withdraw the cash , you don't mean closing any active positions, and you mean withdrawing the Excess Cash that is sitting in the account. But why would withdrawing the cash be beneficial here ? if you withdraw the cash, you have less Total equity in the account, and that would decrease your Total Equity which makes it closer to a Margin Call level. $\endgroup$
    – Calculate
    Commented Jun 12 at 23:27
  • $\begingroup$ @user68819 , i responded to your message above. $\endgroup$
    – Calculate
    Commented Jun 15 at 17:54

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