An investor may speculate on interest rates or hedge a portfolio by using rate based options. Rate based options are open for trading, based on the most recently issued Treasury bill, note and bond. Because an investor cannot deliver a “rate”, rate based options settle in cash and use a contract multiplier of 100. Rate based options have a direct correlation to a change in interest rates. An investor who believes that rates will rise would purchase rate based calls or sell rate based puts. An investor who believes that rates are going to fall would purchase rate based puts or sell rate based calls.

Example:

An investor believes that rates are going to rise and purchases 1 March 70 call at 5. The strike price of 70 = an interest rate of 7%

The premium of 5 = 5 x 100 = $500

If rates were to go to 8% by expiration the investor would have a $500 profit

80 - 70 = 10

The 7% call option would be 10 points in the money at expiration and the investor’s account would be credited $1,000. This is found by multiplying the in the money amount by the contract multiplier of 100. Because the investor paid $500 for the option, their profit would be $500.

  Rates Up Rates Down Settlement

 

Priced Based

Options

 

Buy Puts or

Sell Calls

 

Buy Calls or

Sell Puts

Underlying

Security is

Delivered

Rate Based

Options

Buy Calls or

Sell Puts

Buy Puts or

Sell Calls

 

In Cash

 

Securities Institute - Series 4 exam prep



Introduction

Related Articles
  1. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  2. Investing

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  3. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  4. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  5. Markets

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  6. Managing Wealth

    20 Investments: Options (Stocks)

    What Is It? Options are a privilege sold by one party to another that offers the buyer the right to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time ...
  7. Markets

    How & Why Interest Rates Affect Options

    The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations.
  8. Investing

    A Newbie's Guide To Reading An Options Chain

    Learning to understand the language of options chains will help you become a more informed trader.
  9. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  10. Investing

    Options Basics: Conclusion

    Options are sophisticated trading tools that can be dangerous if you don't educate yourself before using them. Please use this tutorial as it was intended - as a starting point to learning more ...
Trading Center