Interest Rate Options Help!

Q

qazmax

Lets look at FVX - the 5 year note T yield.

FVX JUN 40 P = 9.00 x 10.20
FVX = 25.35

I do not understand the reason that these options trade below (what would be) parity if it were an equity put.

I think it has something to do with the yield curve, the fact that these cannot be early exercised, and the future expectation of interest rates going up. But I have almost no understanding of these type of options.

Please enlighten me (and others I am sure) with any details you can provide.

:)
 
Quote from qazmax:

Lets look at FVX - the 5 year note T yield.

FVX JUN 40 P = 9.00 x 10.20
FVX = 25.35

I do not understand the reason that these options trade below (what would be) parity if it were an equity put.

I think it has something to do with the yield curve, the fact that these cannot be early exercised, and the future expectation of interest rates going up. But I have almost no understanding of these type of options.

Please enlighten me (and others I am sure) with any details you can provide.

:)
More...

Just checked quote
FVX JUL 35 P = 8.50 x 9.70
FVX = 25.57

Look reasonable to me.

Where is this FVX JUN 40 P? Should expired. Am I missing something here?
 
The first I thought when someone told me there was a June 40 P was they must mean Jan, since it is a leap. It is definitely June. they have a different expiration cycle too apparently...

The Jun 40 P should have at least 15 dollars of intrinsic value if the underlying were trading 25. Seems logical for an equity option. This does not appear to be the case for interest rate options.

Hence why I ask for help...

:)
 
You're looking at a June 2004 option

As of right now - FVX is 25.97 and the June 2004 40 put is quoted at 8.50x9.70

There's no open interest, has been traded yet, and no size on it - so it's probably a stale quote. If you try to hit it, you'll be able to see how fast it changes to something like probably around 15 or 16.
 
Sounds logical... can you hit the offer and prove it?

Should have pleanty of edge if you are right.

My guess is that it fills and doesn't move the offer at all...

:)
 
Hopefully you're not asking someone else to hit the quote for you, since you're the one interested in the darn thing. If you want to try to hit the quote to see if it's real or stale, by all means give it a try.

It'll probably just move the quote and go unfilled. On the off chance, a contract gets filled without moving the quote - I certainly don't want it, but you might.

You do know that the FVX are European style options, so you can't immediately exercise it?? And you'll pay the spread to unload it if you do for some reason get filled.
 
There is no malice or self-interest here... just trying to get educated.

If you read the original post you will see that I understand the lack of early exercise...

I will not hit the offer because I do not believe they are "stale" quotes at all. It may be that they are indeed stale qotes, but I would wager against it right now until it is proven otherwise.

I am just looking for a market maker in these or someone who knows for a fact, not just a guess, what is going on with interest rate options to help educate the rest of us.

:)
 
My horoscope says I am out of sequence with the planet alignment. So I humbly apologize for any doubt I had.

Well there you go...

FVX not that confusing afterall, just got some bad info from OCC.

They were just an off quote.

10 times the yield of the 5 year note is all the underlying is... nothing so tough going on.

:)
 
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