Interest Rate Put Options

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Interest Rate Put Options

http://www.options-trading-education.com/24028/interest-rate-put-options/

With the possibility at hand that interest rates may fall, interest rate put options could be profitable. As with all options trading interest rate put options require a sound options trading strategy. Unlike trading options on stocks or commodity futures, trading interest rate put options do not have to do with a specific company or a commodity such as gold, corn or oil. Rather interest rates are driven by the economy and by the actions of the United States central bank, the US Federal Reserve. The Federal Reserve is cutting back on its monthly bond purchases, the quantitative easing stimulus plan widely credited from keeping the country from falling into a long term depression. As the Fed stops pouring money into buying US Treasuries and corporate bonds it serves to let rates fall and the value of existing bonds to rise. With this factor at work one would jump on interest rate put options as rates would be falling. But, there are more factors in play that might make calls on interest rates profitable ventures.

Interest Rate Options

An interest rate option is a derivative contract. The value of that contract is based on interest rates, typically the ten year Treasury note. When traders believe that interest rates will go up they buy calls and when they believe that rates will fall they buy puts. A trader with a call contract makes money when interest rates rise and a trader with a put contract profits when rates fall.

China, Europe and Housing Starts

China has seen its growth rate slow down. The response of the central bank of China has been to buy US Treasuries. This drives up the value of the dollar on Forex markets and drives down the Chinese currency. In addition, it can serve to drive interest rates back up because of buying pressure on the market. In addition, the EU is still struggling to get out of the persistent recession on its Southern flank and its stimulus programs may also drive the dollar higher. And, economists are pleased on one hand that the value of family homes is on the rise and on the other hand that that rate of increase is leveling off. This means that people that were upside down on their mortgages are in better shape. And, what do these factors have to do with interest rates?

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Interest Rate Put Options

  1. 1. Interest Rate Put Options
  2. 2. With the possibility at hand that interest rates may fall, interest rate put options could be profitable.
  3. 3. As with all options trading interest rate put options require a sound options trading strategy.
  4. 4. Before We Continue… Click the links below to get your FREE training materials. Free Weekly Investing Webinars Don’t miss these free training events! http://www.profitableinvestingtips.com/free-webinar Forex Conspiracy Report Read every word of this report! http://www.forexconspiracyreport.com
  5. 5. Unlike trading options on stocks or commodity futures, trading interest rate put options do not have to do with a specific company or a commodity such as gold, corn or oil.
  6. 6. Rather interest rates are driven by the economy and by the actions of the United States central bank, the US Federal Reserve.
  7. 7. The Federal Reserve is cutting back on its monthly bond purchases, the quantitative easing stimulus plan widely credited from keeping the country from falling into a long term depression.
  8. 8. As the Fed stops pouring money into buying US Treasuries and corporate bonds it serves to let rates fall and the value of existing bonds to rise.
  9. 9. With this factor at work one would jump on interest rate put options as rates would be falling.
  10. 10. But, there are more factors in play that might make calls on interest rates profitable ventures.
  11. 11. Interest Rate Options
  12. 12. An interest rate option is a derivative contract.
  13. 13. The value of that contract is based on interest rates, typically the ten year Treasury note.
  14. 14. When traders believe that interest rates will go up they buy calls and when they believe that rates will fall they buy puts.
  15. 15. A trader with a call contract makes money when interest rates rise and a trader with a put contract profits when rates fall.
  16. 16. China, Europe and Housing Starts
  17. 17. China has seen its growth rate slow down. The response of the central bank of China has been to buy US Treasuries.
  18. 18. This drives up the value of the dollar on Forex markets and drives down the Chinese currency.
  19. 19. . In addition, it can serve to drive interest rates back up because of buying pressure on the market.
  20. 20. In addition, the EU is still struggling to get out of the persistent recession on its Southern flank and its stimulus programs may also drive the dollar higher.
  21. 21. And, economists are pleased on one hand that the value of family homes is on the rise and on the other hand that that rate of increase is leveling off.
  22. 22. This means that people that were upside down on their mortgages are in better shape.
  23. 23. And, what do these factors have to do with interest rates? Things that improve the economy tend to raise consumption, prices and the demand for credit. Higher demand for credit tends to raise interest rates.
  24. 24. Things that hurt the economy tend to drive down consumption, prices and the demand for credit and then interest rates fall.
  25. 25. So, the Fed actions are not the only game in town when it comes to whether interest rates rise or fall.
  26. 26. Nevertheless, the near term prospect of lower interest rates could make interest rate call options a good deal.
  27. 27. As always do your own homework and do not trade when you do not understand.

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