What am I buying here?
Is it the same as an option on the bond?
You;re short IR, long BP
That makes sense. THANKS!!
You mean a bond with a call option? In such a case, is a repayment option, the option to pay back the bond, and it adds value to it (i.e. higher yield for the lender).
I’m just guessing here, but I would imagine that there’s a difference between a callable bond and call option on a bond.
A callable bond would only be callable by the issuer, and it would be part of the bond covenant that they could call the bond at 102 or 105 or something.
A call option on a bond can be purchased by anybody for any strike price. So if Radio Shack bonds are selling at 30, I could buy a call option on them at 35. Then, when Radio Shack rebounds and the bond price goes back to par, I can buy it at 35.
I’ve never heard anything specifically called a “call option on a bond price”, but there are certainly call options on bonds (just as there are call options on stocks). They’re usually on government bonds; some are settled by delivery of the bonds, others are settled in cash.
That’s what was confusing. Schweser says " Options are traded on both interest rates and on prices of fixed income securities" It has a chart (page 130 for those who have the schweser books). of options on Rate and Options on Prices. If rates increase and Bond prices decrease, the value of a put on bond price Increases. If rates decrease and bond Prices Increase, the value of a call on bond price increases. I was told this was an important chart so I was trying to understand it
If i think of it as being short IR and long the bond as shotforthestars1 said then it makes more sense. But I’ve never heard of an option on a bond price
30 is pretty rich for a radio shack bond.