Hey everyone,
I came across an article about a high-stakes Treasury options trade that caught my interest, but I'm having some trouble understanding the mechanics of the trade. Here's a summary:
- A trader entered into a risk reversal position with Treasury options.
- The trade involved selling put options and buying call options on the 10-year Treasury note futures with strike prices of 108.25 for the puts and 109.75 for the calls.
- The position cost about $150,000 and stands to make around $15 million if the 10-year yield drops to 4.25% by May 24. Conversely, it could lose as much if the yield rises to 4.7%.
- Profit starts if the yield falls below 4.35%, and losses begin if it rises above 4.58%.
The trade might be a hedge against other positions or a bet on increased volatility.
I understand the basics of calls and puts, but I'm unclear about a few things:
- How exactly does a risk reversal work in this context?
- Why would a trader choose this strategy over others?
- How do changes in implied volatility impact this position?
- What kind of adjustments can the trader make if the yields start to move against their position?
Would appreciate any insights or explanations from the community. Thanks!
High-Risk Options Bet on Bond Rally: Seeking Clarification on Trade Mechanics
byu/Tasty-Window inoptions
Posted by Tasty-Window