Interest Rate Options

Interest rate Options are European-style, cash-settled options on the yield of U.S. Treasury securities. Available to meet your needs are options on short, medium, and long-term rates. These options give you an opportunity to invest based upon your views of the direction of interest rates.

In general, when yield-based options are purchased, a call buyer and a put buyer have opposite expectations about interest rate movements. A call buyer anticipates interest rates will go up, increasing the value of the call position. A put buyer anticipates that rates will go down, increasing the value of the put position. A yield-based call option buyer will profit if, by expiration, the underlying interest rate rises above the strike price plus the premium paid for the call. Alternatively, a yield-based put options buyer will profit if, by expiration, if the interest rate has declined below the strike price less the premium paid. Of course taxes and commissions must be taken into account in all transactions.