An Equity Derivatives trader. Don’t know what this title means. My assumption is stock prices are factored from yield curves.

In the old days of trading, all financial instruments especially currencies were traded along the yield curve. Still widely exists today as a strategy among the smarter traders but its never seen or mentioned anymore.

Many examples how to trade the EUR/USD from yield curves are located on this site.

Currency trades from yield curves for example, are traded as yield crossovers between nations such as USD/CAD vs the USD and Canadian 2 and 3 year yield. Longer term trades are factored from 5, 7 and 10 year crossovers. A trade may factor from a single nation’s yield curve.

Trades may factor for another example by ranges of certain yields. The trade is short and long at tops and bottoms of yield ranges. What’s important in this regard is Currency trades are also traded by Forward Points and Forward Points are located at each yield. The higher price travels up the yield curve then the more forward points increase in ranges.

The same concept exists to currency and all financial market prices. As prices travel up the yield curve then the more ranges expand. But so does tops and bottoms become important as location is most vital to a price yet its the least understood concept among today’s traders.

A price trading at the 10 year yield contains much daylight to drop as the only points remaining on a yield curve is the 20 and 30 yield and its the tops. A price can’t and won’t travel higher than a 20 and 30 year yield.

The concept to overbought and oversold is found in the location of a price along its interest or yield curve. The better concept is to high or to low. A price trading at the 10 year yield is overbought or to high while a price at the 1 year yield is low or oversold.

Another way to trade currencies is by the interest rate curve and its my way. Interest rates are lower and trade below yields. They are the first rates offered by central banks daily and interest rates prices yields.

Most vital is all financial instruments trade by an interest rate either as a pure interest rate or yield. Its impossible not to trade a price by an interest rate of some sort as market prices move, currencies especially, by an interest rate.

I factored today’s S&P’s by this morning’s yield curves to understand an Equity Derivatives trader. Using yield curves for trading is a view to longer term trades as ranges are extremely wide.

1. The S&P’s opened at 3281. 06. All financial prices open and close many, many times at equilibrium. Viewed better to understanding is open and close at neutral. The S&P’s opened today at neutral 3281.06. This price had an equal chance to rise or fall and this is what neutral means.

2. What is factored 1st is a yield rate and this rate is calculated above and below. Above means factor from normal yield rates and below means factor the inverse of yield rates. The purpose is to understand interest ranges and averages to our financial price trades.

Above yield rates from the 3 month rate at 0.081 to 1.417 at the 30 year factors using the current Fed overnight rate at 0.09.

Mean. 1.0673

Median 1.00 or Parity

SD. 0.4056.

Above range factors

Mean. 3502.18

Median. 3281.16

SD. 1330.01.

Range Averages factors

Mean.3502.18

Median. 3286.89

SD. 368.15

Check for yourself as today’s trade able levels: 3281.17, 3281.22, 3281.54, 3282.43, 3284.23, 3286.89, 3319.85,3419.53, 3583.37, 4126.24 and 4377.59

Bottom.

Interest Rates

Mean: 0.0106

Median. 0.0099

SD. 0.0040.

Top Vs Bottom Interest rates ranges: 1.0673 Vs 0.0106.

Range Averages

Mean. 3500.28

Median. 3281.05

SD. 1361.23

Average of Ranges

Mean: 3523.85

Median: 3346.67

SD: 373.79

Results

BY taking range averages for tops and bottoms, we have: 3523.85, 3500.28, 3502.18 and 3502.18.

4 numbers represents most vital averages. Same principle and concept is employed and holds for our currency day trades. Its a must know to where vital averages are located above and below for any given day.

We know every vital range point from 1607.71 to highs at 6627.74.

We know interest rates and interest ranges. Its learned over time how to understand and interpret the interest rate averages to an interest rate as to high or low in relation to high and low financial prices by taking the interest rate X and divide by the average price. You’ll find a market price and the inverse to the market price.

As can be seen from the list above, yields offers today’s trade yet ranges are extremely wide. And its why I don’t like using yields for an S&P trade but rather central bank interest rates. Ranges are not as wide as yields.

Trade by Inverse.

The inverse price to 3281.06 is 0.00030.

The overall ranges to inverse prices are located from 0.00030 to 0.00041. Inverse prices are located at vital range points. Much easier to trade by inverse numbers as ranges are much smaller and they don’t change by much each day.

To trade any stock market is to know each nation’s interest rate. Its perfectly accurate for trades daily and long term. Its impossible not to be accurate.

The sad part to professional and perfect method trading is the concepts disappeared from public view in favor of speculators with money but not a clue to what they do and why.

Brian Twomey