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Interest Rate Options Trading
The most profitable trading commonly occurs during times of great volatility. Right now interest rates are volatile. Yields are rising as traders expect the Federal Reserve to cut back on its quantitative easing program. This could be within a month. The Fed’s quantitative easing program is the monthly purchase of $85 Billion in US Treasuries. This program has driven interest rates down and kept them there. The result has been a resurgence of American industry and housing market. Unemployment is down as well. The Fed expects to reduce this program gradually as the need diminishes. The result of the Fed making this announcement has been a wholesale selloff of bonds. Bond buyers expect to see interest rates rise and do not want to be caught with low interest rate bonds. If you buy a bond that pays one percent interest and rates rise to three percent you have a bond that you need to hold to maturity or sell at a loss. Traders can profit in this environment by trading bonds or via interest rate options trading. Fundamental analysis of the economy in an attempt to predict Fed action will be useful in this regard. And technical analysis of the market itself may be more useful to the extent that the market is spooked.
The Scoop on Interest Rate Options Trading
On the Chicago Board Options Exchange you can trade European style cash settled options on US Treasury yields. Trading has to do with projected interest rates. Rates traded include those for short middle or long term treasuries. A call contract gives the buyer payment if rates go up and a put gives the trader payment if rates fall.
CBOE Interest Rate Options Trading Symbols
Thirteen Week Treasury: IRX
Five Year Treasury: FVX
Ten Year Treasury: TNX
Thirty Year Bond: TYX
Expiration dates for interest rate option trading are the Saturday following the third Friday of the expiration month.
Interest Rate Options Trading Today
Traders believe that the Fed will go ahead and cut back on its quantitative easing program. This would drive up interest rates. Thus many are buying calls. Bond holders are selling in order to get out of low interest rate bearing bonds before interest rates jump up. As with all trading scenarios, the market may overshoot. Thus a smart trader could make money by purchasing puts at the right time. An old strategy that often works is called a long straddle. In this case the trader buys both a put and a call. He wins if the interest rate goes either way. His risk is limited to the price of the two contracts. Profitable day trading strategies might be to buy and sell options contracts as the market waffles back and forth in anticipation of Fed action and the market’s response.