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Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Options Jive

Trading the U.S. Treasury Curve

Aug 3, 2016

The Best Practices from June 13, 2016: DV01: DV of What? introduced the concept of DV01 and how it might influence trading U.S. Treasuries. We can use DV01 to take direction out of trading Treasuries. How exactly do we do that?

To take direction out of trading interest rates, we trade DV01-neutral spreads on the basis of flattening or steepening yield curve. A guideline for trading DV01 neutral spreads on whether the yield curve flattening or steepening was displayed. The guideline showed that when the yield curve was flattening, the spread between near-term and long-term rates was decreasing. A table of the CME’s current DV01-neutral spread ratios was displayed. The ratios for the spreads between the 2-year Note, 5-year Note, 10 year Note and 30 year Bond were listed.

A histogram of the P/L change for DV01-neutral spreads versus a straight 1:1 spread was displayed. The DV01-neutral spreads were much less volatile. Instead of using just the Futures traders can also use Futures Options by applying the ratios to Delta positions. This can be done to reduce the notional size, reduce margin costs and the resulting Buying Power Reduction (BPR) and/or to add a Theta (time decay) component. One or both sides can be done with options. A table showing how to use Futures options along with the Futures to create a DV01-neutral spread was displayed.

Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and a better understanding of how use DV01-neutral spreads to take direction out of yield curve trades.

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