Many governments spend in excess of tax revenue. As an alternative to hiking taxes, these governments raise funds by selling government bonds, such as U.S. Treasury bonds. Government bonds are considered 澳洲幸运5官方开奖结果体彩网:risk-free because stable governments are not expected to default. These 澳洲幸运5官方开奖结果体彩网:debt instruments are ꦦmore popular when stocks look weak, encouraging ♊skittish investors to seek safer options.

Another way to invest in debt instruments and 澳洲幸运5官方开奖结果体彩网:government bonds is via 澳洲幸运5官方开奖结果体彩网:derivatives that include futures and options. One factor posing a risk to debt instruments are 澳洲幸运5官方开奖结果体彩网:interest rates. As a general rule, bond prices fall as interest rates rise, and vice versa. Options tied to interest-rate instruments such as bonds are a convenient way to hedge against fluctuating rates. Within this category, o💛ptions on Treasury futures are popular because they are liquid and transparent. There a𝓀re also options on cash bonds. 

Options on Bond Futures

澳洲幸运5官方开奖结果体彩网:Options contracts provide flexibility as the purchaser is buying the right (rather than an obligation) to buy or sell the underlying instrument at a predetermined price and expiry date. The option buyer pays a premium for this right. The premium is the maximum loss the buyer will bear, while the profit is theoretically unlimited. The opposite is true for the option writer (the person who sells th𝕴e option). For the option seller, the maximum profit is limited to the premium received, while losses can be unlimited.

The options buyer can purchase the right to buy (澳洲幸运5官方开奖结果体彩网:call option) or to sell (澳洲幸运5官方开奖结果体彩网:put option) the underlying futures contract. For example, a buyer of a call option for a 澳洲幸运5官方开奖结果体彩网:10-year Treasury Note is taking a long position, while the seller is taking a short position. In the case of a put option, the buyer is taking a short position, while the ♒seller is taking a long position in the futures contract.

Covered Options

An option is said to be "covered" if the option writer holds an offsetting position in the underlying commodity or futures contract. For example, a writer of a 10-year Treasury futures contract would be called covered if the seller either owns cash market T-Notes or is long the 10-year T-Note futures contract.

The seller's risk with a covered call is limited, as the obligation towards the buyer can be met either by the ownership of the futures position or the cash security tied to the underlying futures contract. In cases where the seller doesn't possess any of these to fulfill the obligation, it is called an 澳洲幸运5官方开奖结果体彩网:uncovered or naked position. This is riskier than a 澳洲幸运5官方开奖结果体彩网:covered call. 

While all terms of an option contract are predetermined or standardized, the premium paid by the buyer to the seller is determined in the marketplace and in part depends on the chosen strike price. Options on a Treasury futures contract are available in many types, and each has a different premium according to the corresponding futures position. An option contract will specify the price at which the contract can be exercised along with the 澳洲幸运5官方开奖结果体彩网:expiration month. The predefined price level selected for an option contract is called its 澳洲幸运5官方开奖结果体彩网:strike price or 澳洲幸运5官方开奖结果体彩网:exercise price. 

The difference between the strike price of an option and the price at which its corresponding futures contract is trading is called the 澳洲幸运5官方开奖结果体彩网:intrinsic value. A call option will have an intrinsic value when the strike price is less than the current futures price. On the other hand, a put option gains intrinsic value when its strike price is gr♎eater than the current future🎀s price.

An option is "at the money" when the strike price is equal to the price of the underlying contract. An option is 澳洲幸运5官方开奖结果体彩网:in the money when the strike price indicates a profitable trade (lower than market price for a call option, and more than market price for put options). If exercising an option means immediate loss, the option is called 澳洲幸运5官方开奖结果体彩网:out of the money.

An option's premium is also dependent on its 澳洲幸运5官方开奖结果体彩网:time value, that is, the possibility of any gain in intrinsic value before expiry. As a general rule, the greater the time value of an option, the higher the option premium will be. Time value decr📖eases and decays as an option contract nears expiration.

Options on Cash Bonds

The market for options on cash bonds is smaller and less liquid than for options on Treasury futures. Traders in cash bond options don't have many convenient ways to hedge their positions and when they do it comes at a higher cost. This has diverted many towards trading cash bond options 澳洲幸运5官方开奖结果体彩网:over-the-counter (OTC), as such platforms cater to the specific needs of clients, especially institutional clients like banks or hedge funds. Specifications such as strike price, expiration dates, and face value can be cusꦍtomized.

The Bottom Line

Options on debt instruments provide an effective way for investors to manage interest rate exposure and benefit from price volatility. Among debt market derivatives, the most liquidity will be found with U.S. Treasury futures and options. These products have wide market participation from around the world through exchanges such as 澳洲幸运5官方开奖结果体彩网:CME Globex.