Speculation, bond options

Bond options can also be used to speculate on anticipated movements in bond prices or volatility. In this section we will explore both possibilities. 

In addition to speculating on bond prices themselves, bond options also allow professional investors to speculate on anticipated changes in volatility. Volatility in this context is not necessarily the actual fluctuations in bond prices, but the fluctuations that option traders anticipate will happen in the future, and which are constantly being factored into bond option prices. 

The simplest way to speculate is simply to buy bond call options. The ATM calls struck at 116.50 are priced at 1.18, so buying these options on a notional bond face value of 100 million would involve buying 996 contracts, and would cost 1.18 million. Exhibit 17.23 illustrates the resulting payoff profile. 

---