For the sake of simplicity, taxes, commissions and other trading costs have
been omitted from the discussions and strategies in this discussion; these
should be taken into account when making your investment decisions. The
strategies are based on hypothetical situations and should only be considered as
examples of potential trading approaches.
Using options to implement interest rate strategies offers several advantages to transacting in cash Treasury securities:
Option buying involves a known and limited risk. Like any option, the most an option buyer can lose if interest rates move against him is the premium paid for the option. Unlike a Treasury security, however, an option can expire worthless. Uncovered option selling involves limited profit and unlimited risk. Like any option, the most an uncovered seller can make is the premium received and the risk is unlimited if interest rates move against him.
Options provide leverage. An option buyer pays a relatively small premium in relation to the value of the underlying security. If interest rates move as anticipated, substantial profits relative to the capital invested may be realized. If the interest rates do not move as anticipated, the buyer's risk is limited to the premium paid.
Options involve a specific time period. An option buyer can choose an expiration month which meets his time expectations for interest rates moves. Treasury securities do not have to move immediately for a buyer to profit on his option position. However, a move in the anticipated direction must occur by option expiration in order for the option position to become profitable.
In the following examples, we present a variety of possible option strategies for different interest rate forecasts. These are only a few of the strategies that might be employed. There are numerous other strategies, some more sophisticated than others, that may be used by investors who are experienced and understand how they work and when to use them. The examples discussed below are based on hypothetical situations, should only be considered samples of potential investment alternatives, and are presented for educational purposes only.
The positions are shown being held to expiration. It should also be noted that taxes, commissions and margin requirements have not been included in the following examples to simplify the explanations. They are important and must be taken into account when considering an actual trade, and when calculating actual net returns on any option transaction. These charges and requirements may vary, and should be discussed with your investment advisor.
Options on Interest-rate Exchange-traded Funds (ETFs)
In addition to cash-settled interest rate options such as IRX options, CBOE also offers options with physical settlement and American-style exercise on a number of interest-rate ETFs, including the following:
Options involve risk and are not suitable for all
investors. Prior to buying or selling an option, a person must receive a copy
of Characteristics and Risks of Standardized
Options (ODD). Copies of the ODD are available from your broker, by
calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North
Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this
website is provided solely for general education and information purposes and
therefore should not be considered complete, precise, or current. Many of the
matters discussed are subject to detailed rules, regulations, and statutory
provisions which should be referred to for additional detail and are subject to
changes that may not be reflected in the website information. No statement
within the website should be construed as a recommendation to buy or sell a
security or to provide investment advice. The inclusion of non-CBOE
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