Build a positioning strategy around an expected rise or fall in interest rate volatility
The idea
Volatility views are expressed through convexity. If the manager expects realised volatility to exceed the implied volatility priced into options, adding convexity pays: buy options such as calls on bond futures or swaptions, or prefer option-free bonds and barbells to callable bonds and mortgage-backed securities, which are short volatility. If volatility is expected to be lower than implied, sell convexity: hold callable bonds or MBS for their extra yield, or write options to collect premium. The key comparison is expected realised volatility against implied volatility. The trap is treating convexity as free: it is paid for through lower yield or option premium and loses money if rates barely move.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Yield Curve Strategies
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