What Is a Futures Bundle?
A futures bundle is a type of futures order. The bundle enables an investor to simultaneously purchase 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 referred to as buying futures strips.
- A futures bundle is an order that contains all the quarterly futures contracts within bundle periods extending into the future.
- The first contract in any bundle is typically the first quarterly contract in a futures strip.
- Investors use futures bundles to lock into a specific price for their target timeline, improve liquidity, and reduce operational complexity.
Understanding Futures Bundles
A futures bundle is an order that contains all the quarterly futures contracts within bundle periods extending as far as 10 full years into the future. Therefore, futures bundles can have up to 40 expirations in four quarterlies over 10 years. The first contract in any bundle is typically the first quarterly contract in a futures strip; however, bundles can be ordered starting with any quarterly contract.
There are many reasons that investors could benefit from purchasing futures bundles, such as to lock in a specific price for their target timeline, improve liquidity, and reduce operational complexity. For example, a large gold-mining company could profit from using a futures bundle to stabilize the price it will receive for its gold over the next four years.
An investor may choose to purchase a futures strip to lock in the price of natural gas for six years instead of rolling over their trade and paying extra trading costs for additional futures contracts every time a shorter-term contract expires. A wheat farmer might sell a futures bundle to gain certainty about how much they will earn from a specified amount of wheat for the next several years.
Futures bundles are commonly traded in the Eurodollar market. Eurodollar futures bundle strips are often color-coded to simplify reference to specific contract months. The Chicago Mercantile Exchange developed a color-coding system for which white represents the first year, red the second, green for third, blue for fourth, gold for fifth, purple for sixth, orange for seventh, pink for eight, silver for ninth, and copper for tenth. For example, a three-year green bundle would include the first 12 quarterly expirations together in one package, and a five-year gold bundle would involve 20 quarterly expirations all included in one transaction.
Futures Bundles and Futures Packs
Similar to futures bundles, futures packs are another way of executing a strip trade. Packs are futures contracts delivered over four consecutive months, essentially making them shorter-term bundles. The prices of 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 increments of one-quarter of a basis point. In 2016, packs and bundles composed approximately 20% of all Eurodollars futures contract transactions. Futures strips, packs, and bundles are commonly used in trading interest rates, agricultural goods, and energy futures.