Quote from bone:
Ah, the two village idiots again. Welcome to the world of fixed income with its charming syntax. Basis is one thing with 'clean' and 'dirty' prices but options are on another level entirely. If I had said "out of moneyness" instead of "beyond the money" it would still have meant no difference to you.
Whatever you do, never pick up a phone and call a bond future options desk on the floor of the Board for an iron fly quote or a dealer in Houston for an LN strangle quote. Not a retail guy in Delhi - a floor operations desk. Hell, you wouldn't even know how to quote the strikes on an options spread.
I'm bullish rates in May, but I'm unsure of time horizon (that's theta) and want some downside protection so I buy a Ten Year Bull Call Spread 18 tics out of the money (to simplify for you, after 18 tics the front strike in the vertical spread [you know, the long one] is known to be in the money ITM). It was great timing, because June was pretty close and I could get Sept without going to the Flex market, but I digress. (go ahead, quickly Google the flex market) Long story short, we rally through both strikes (again, to simplify for you, the second strike in the vertical spread is the short call position which we sell to limit our downside risk and minimize the theta (thats time) component. Did I mention that the first strike is the long call leg that's deep in the money by now? OK, so, well, we keep rallying!! But you know what? My position doesnt earn any more money as it continues to rally past the second vertical strike (the short leg) - no more moneyness. beyond money. yep, that's what its called. it can rally to the moon and it keeps a very slight net positive delta but never keeps its value. What do I do with that slight positive net delta? I do what we call a horizontal spread - I sell a higher strike in the Dec contract, but since that strike price is still a few points higher, in the business we call that out of the money, or OTM. Using the profit from the Sept. bull call spread I sell enough Dec 130 deltas to cover the slight delta risk and gain the vega (thats the volatility part, google it real quick) and theta (we talked about that, that's the time premium component). As a side note the timing for the Dec 130's is great because the premium three months out is really fat, but again, I digress and confuse the two idiots again).