For options that benefit the issuer, such as calls, investors will want yield spreads that are greater than bonds and that do not have options embedded in them. Because there is a risk that the bonds will be called, investors want a higher yield to compensate for that risk, causing the spread to widen over the treasury security when compared to bonds without options. The longer the call period, the less spread widening investors will be needed because of a longer protection period against the call.
Options That Benefit the Holder
For options that benefit the holder, such as puts, investor will require a smaller yield spread than bonds that do not have embedded options in them, such as treasury bonds. There is even the possibility that the coupon rate could be lower than the treasury coupon rate, depending on how favorable the option is to the investors.
Spreads and Liquidity
When issues are less liquid, yield spreads tend to widen because there are fewer bonds to buy or it is harder to find a buyer. When issues are more liquid, such as on-the-run treasuries, yield spreads are tighter or narrower because there are plenty of buyers and sellers.
The larger the issue size, the more liquidity compared to a smaller issues in the market leads to tighter or narrower spreads and vice versa.
After Tax Yield of a Taxable Security
InvestingCorporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
TradingA credit spread has two different meanings, one referring to bonds, the other to options.
InvestingInvestors should be aware of embedded options that may be available in certain securities as these options may affect the value of the security.
InvestingFind out which bonds you should be investing in and when you should be buying them.
TradingKnowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
TradingA bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
TradingThis options spread strategy provides many advantages over plain old puts and calls.