Hedging with Yield-Based (Interest Rate) Options

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Chapters in this video

  1. 0:00 Why yield-based options work backwards
  2. 0:45 The inverse teeter-totter and the TYX strike trick
  3. 2:12 Carla's long bonds: hedging with calls
  4. 3:18 Flipping it: short seller buys puts
  5. 3:56 TYX 42 call settlement math
  6. 4:52 Cash-settled, European-style, $100 multiplier
  7. 5:17 Rapid-fire exam recap

What this video covers

  • Why yield-based options track Treasury yields (not bond prices), and what the inverse teeter-totter relationship means for call and put behavior
  • How to read a Thirty-Year Treasury Bond Yield Index (TYX) strike price with the implied decimal: TYX 45 equals a 4.5% yield
  • Why a long bondholder worried about rising rates hedges with yield-based calls, not puts, and why that reverses equity-options instinct
  • Why a short seller of bonds worried about falling rates hedges with yield-based puts
  • How to compute settlement: (settlement yield minus strike yield) times the $100 multiplier, then net the premium
  • Why yield-based options are cash-settled and European-style, just like index options
  • The exam trap of confusing yield-based options with price-based bond options

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