Investors are betting that interest rates will rise faster than expected by purchasing put options on interest rates. The put to call ratio on interest rate options has risen from 1.9 to 3.2, indicating that more investors now expect rates to increase sooner as employment figures rise and the Federal Reserve continues to phase out its bond purchasing stimulus program and raise rates. Traders are using short-term interest rate options to profit from any potential policy changes or surprises from the Federal Reserve regarding interest rates.

1. By: www.Options-Trading-Education.com

2. In interest rate options trading
traders are positioning themselves
for a faster than previously expected
rise in interest rates.

3. As reported in Bloomberg, a faster
rate rise is expected as evidenced by
a change of the put to call ratio on
interest rates from 1.9 to 3.2.

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5. Options Wager

6. Investors in put options are betting that
market participants will raise their
expectations for the level of the federal
funds rate in 2017.

7. They are wagering that Fed policy
makers meeting this week will forecast a
higher rate at the end of 2017 than most
investors now predict.

8. As of Sept. 10, there were 3.2 active put
options for every active call option,
according to data from CME Group Inc.

9. That’s up from a ratio of 1.9 on the final
day of the FOMC’s July 29-30
gathering.

10. Using short-term options on the contract
allows traders to place a bet on a policy
surprise from the Fed at a relatively low
cost and limits the damage in case the
trade doesn’t work out, because holders
of the options can only lose as much as
they paid for them.

11. The Federal Reserve is phasing out
its quantitative easing stimulus
program.

12. The $85 billion a month purchase of
bonds has been reduced and the
general consensus is that it will be
done by the next month.

13. Federal Reserve officials have stated
that they will keep interest rates low
as long as it takes for the economic
recovery to be secure.

14. But, as employment figures rise
speculation is that the Fed will push
rates up soon rather than later.

15. Interest rates options are a practical
way to profit from such a move.

16. Interest Rate Options

17. An Interest rate option is a specific
financial derivative contract.

18. Its value is based is based on interest
rates such as the yield on 10 year
treasury notes.

19. Just like with equity options one can
purchase calls or puts. Traders
purchases calls if they believe that
rates will go up and puts if they
believe that rates will fall.

20. A useful reference is the CME Group
Options Open Interest Rate Tool.
Rate curves displayed include the
following:

21. Eurodollar
1 Year Mid Curve
2 Year Mid Curve
3 Year Mid Curve
4 Year Mid Curve
5 Year Mid Curve
2 Year Note
5 Year Note
T bond
Ultra

22. As will all options trading it is smart
to focus on one aspect of the market
with which you are familiar in
trading interest rate options.

23. Profitable Interest Rate Trading

24. There are many profitable options
strategies that can be applied to
interest rate options trading as well
as trading other kinds of options.

25. Basically interest rate options trading
has to do with forecasting what the
Federal Reserve will do with rates
and other basic economic factors that
tend to drive rates up and down.

26. Short term interest rate options
trading has to do with reading
market sentiment using technical
analysis tools in order to profit from
the inefficiency inherent in all
markets.