Treasury investments allow you to build a core bond portfolio with incredibly low default risk.

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  1. For traders, they represent a market that can be bigger than stocks.
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  3. The Basics of US Treasury Futures - CME Group - CME Group

For example, a writer of a year Treasury futures contract would be called covered if the seller either owns cash market T-Notes or is long the year T-Note futures contract.

The seller's risk with a covered call is limited, as the obligation towards the buyer can be met either by the ownership of the futures position or the cash security tied to the underlying futures contract.

In cases where the seller doesn't possess any of these to fulfill the obligation, it is called an uncovered or naked position. This is riskier than a covered call.


While all terms of an option contract are predetermined or standardized, the premium paid by the buyer to the seller is determined in the marketplace and in part depends on the chosen strike price.

An option contract will specify the price at which the contract can be exercised along with the expiration month. The options on government bonds as a strategy price level selected for an option contract is called its strike price or exercise price. The difference between the strike price of an option and the price at which its corresponding futures contract is trading is called the intrinsic value.

A call option will have an intrinsic value when the strike price is less than the current futures price.

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On the other hand, a put option gains intrinsic value when its strike price is greater than the current futures price. An option is "at the money" when the strike price is equal to the price of the underlying contract.

Bonds, Notes, and Bills

An option is in the money when the strike price indicates a profitable trade lower than market price for a call option, and more than market price for put options. If exercising an option means immediate loss, the option is called out of the money. As a general rule, the greater the time value of an option, the higher the option premium will be.

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Time value decreases and decays as an option contract nears expiration. Options on Cash Bonds The market for options on cash bonds is smaller and less liquid than for options on Treasury futures. Traders in cash bond options don't have many convenient ways to hedge their positions and when they do it comes at a higher cost.

Specifications such as strike price, expiration dates, and face value can be customized.

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The Bottom Line Options on debt instruments provide an effective way for investors to manage interest rate exposure and benefit from price volatility. Among debt market derivatives, the most liquidity will be found with U.

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Treasury futures and options. These products have wide market participation from around the world through exchanges such as CME Globex.

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