What does Cheapest to Deliver - CTD mean?
The lowest cost bond among possible bond delivery options that can be used to satisfy the short positions contractual obligations on a bond futures contract. On bond futures contracts the party with the short position in the futures contract typically has multiple options of delivery (vary on coupon payments, maturities) to satisfy the conditions of the contract, where the cheapest to deliver bond is the bond that maximizes the return for the short position.
Futures Knowledge Explains Cheapest to Deliver - CTD
Because the short position has various bond options in delivering on the futures contract there is a optimal choice that will provide the biggest profits. The cheapest to deliver bond is the one that minimizes the difference between the cost to acquire the bond less the proceeds from delivery bond.
Cheapest to deliver calculation = Quoted Bond Price (to be delivered) - Settlement Price x Conversion Factor