What is a Futures Pack?
A group of futures contracts is a type of futures order. The bundle allows an investor to simultaneously buy or sell a predefined number of futures contracts in each consecutive quarterly delivery month for one or more years. This single purchase of multiple futures contracts is called a purchase term bands.
Key points to remember:
- A futures group is an order that contains all quarterly futures contracts in group periods extending into the future.
- The first contract in a lot is usually the first quarterly contract in a futures strip.
- Investors use futures contracts to lock in a specific price for their target timeframe, improve liquidity, and reduce operational complexity.
Understanding Futures Packs
A futures group is an order that contains all quarterly futures contracts in group periods extending up to 10 full years into the future. Therefore, futures contracts can have up to 40 expirations in four quarters over 10 years. The first contract in a batch is usually the first quarterly contract in a term band; however, packages can be ordered from any quarterly contract.
There are many reasons why investors could benefit from buying futures, such as to lock in a specific price for their target timeframe, improve liquidity, and reduce operational complexity. For example, a large gold mining company might benefit from using a set of futures contracts to stabilize the price it will receive for its gold over the next four years.
An investor can choose to buy a futures contract to lock in the price of natural gas for six years instead of rolling over their trade and paying additional trading fees for additional futures contracts whenever a shorter contract term expires. A wheat farmer can sell a bundle of futures contracts to be certain of what he will earn from a given amount of wheat over the next few years.
Futures contracts are generally traded in the euro dollar market. Eurodollar futures bands are often color coded to simplify reference to specific contract months. The Chicago Trade Exchange developed a color coding system where white represents first year, red second, green for third, blue for fourth, gold for fifth, purple for sixth, orange for the seventh, rose for the eighth, silver for the ninth, and copper for the tenth. For example, a three-year green package would include the first 12 quarterly expirations rolled into one package, and a five-year gold package would involve 20 quarterly expirations, all included in a single transaction.
Futures Packs and Futures Packs
Similar to term bundles, term packs are another way to execute a strip trade. Packs are futures contracts delivered over four consecutive months, which essentially makes them shorter-term bundles. Prices for futures packs and bundles are quoted in terms of the average net change from the previous day’s settlement prices for the entire group of contracts, in quarter basis point increments. In 2016, packs and bundles accounted for around 20% of all Eurodollar futures transactions.Futures strips, packs and bundles are commonly used to trade interest rates, agricultural commodities and energy futures.