Answer Of The Day

By Craig Bewick
JUL 21 2021

And just like that, the equity markets have bounced back to about where they were trading before Monday’s sell-off and implied volatility has declined as well.  Similarly, US Treasury futures prices at the long end of the curve fell again today and the implied yield in the US T-Bond, which fell dramatically on Monday, is trading within about 1 basis point of Friday’s close.  Also, WTI Crude Oil prices have made up some of the recent losses, up about 4.75% today. 

The QuikStrike graph below illustrates nicely that, while price (orange line) and volatility (blue line) are still trading at elevated levels relative to the last three months, both have come down after Monday’s spike higher.  Remember, CME Group will be listing Micro Treasury Yield futures on Sunday, August 15 (trade date 8/16) which will give traders a streamlined and intuitive way to trade the 2, 5 and 10-Year Notes as well as the 30-Year Bond.  The contracts will be quoted in yield, based on the on-the-run issue, cash settled and have a static basis point value of $10. 

The answer to yesterday’s question is “D” 6.0.  We actually provided the answer to the question in the question itself.  If you noticed, we provided the Theo Call and Put values of 2.9 and 3.1 respectively.  Since a straddle is simply long or short both a Call and a Put at the same strike, simply adding the two theoretical values would give you the value of the straddle.  However, even if you didn’t notice that the answer was provided, the key to the answer is that a straddle is essentially a volatility trade as a trader is long or short both the Call and the Put.  In our example, the effect of the dramatic increase in volatility far exceeds the impact of theta (3 less days until expiration) and the only answer in which the value of the straddle increased was D. 

ABOUT THE AUTHOR

Craig Bewick has spent 25 years in futures and options markets, starting at CBOT and CME working in risk management, regulatory, technology, product management and client development. 

Connect with Craig at activetrader@cmegroup.com

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