U.S. Treasury Weekly options now offer three expiries per week: Monday, Wednesday, and Fridays (note that “Friday Weeklies” refers to the options that are also known as “Weekly options” in the CBOT rulebook). Although all of the weeklies are used each day of the week, Wednesday Weeklies are frequently used to hedge and manage risk for events such as Consumer Price Index publications (which occur Tuesday, Wednesday, or Thursday), Federal Open Market Committee (FOMC) meetings (which occur on Wednesdays), and U.S. elections (which occur on Tuesdays). Friday Weeklies are commonly used for nonfarm payroll (NFP) days which usually occur on a Friday). The newest category – Monday Weeklies – can be used to hedge event risks that occur over the weekend.

Monday Weeklies provide the unique ability to discreetly manage risk by reducing the current maximum day count to expiry from five days (the time between Friday Weekly expiration and Wednesday Weekly expiration) to three days (the time between the Friday Weekly expiration and Monday Weekly expiration). This provides for greater nuance in hedging exposures to swaption and other positions as they move towards expiry. They are liquid and easy to execute, compared to OTC products of short expiry.

Exhibit 1 proves the expiry codes for each option. Exhibit 2 outlines the key differences of the three weekly options.

Average daily volume (ADV) of CME Group Weekly Treasury options have increased as the Federal Reserve has increased interest rates – a reflection of the market’s need for short-dated interest rate options during periods of uncertainty. Exhibit 3 shows that Weekly Treasury options ADV has increased from about 125,000 contracts in 2020 to 347,000 contracts in 2023.

Weekly Treasury options have been especially popular around particular events and have seen outsized volume and liquidity on such occasions. For Wednesday Weeklies, ADV for CPI days and FOMC days is 53% and 13% higher, respectively, than total YTD ADV. For Friday Weeklies, ADV for NFP days is 121% than ADV YTD.

Monday Weekly options offer the ability to hedge any uncertainty that may occur over the weekend such as geopolitical events or election results in certain countries.

For people who manage interest rate risk, the events over 2023 have been material:

• The FOMC has increased interest rates to their highest point in 22 years, with a Federal Funds rate target of 5.25% to 5.50% as of 1 Nov 2023.
• The U.S. federal government budget deficit is $1.7 trillion, the largest deficit ever excluding the pandemic-era 2020 deficit.
• Geopolitical risks in Eastern Europe and the Middle East continue to mount.
• The March 2023 failures of Silicon Valley Bank and Credit Suisse continue to loom large over the health of the global banking system. 

There is a plethora of trading strategies for Weekly options, but we will consider scenarios that revolve around weekend event risk and implied volatility.

In this scenario, an asset manager is bullish about a hypothetical Treasury future currently priced at 109 points. However, he is slightly nervous about some economic uncertainty that could negatively affect the underlying’s price going into the weekend. Despite his bullish sentiment, he wants to purchase some near-term downside protection.

Because he believes that the hypothetical Treasury future is undervalued at 109 points, he purchases that product. He also looks at the price of Monday Weekly put options and sees that out-of-the-money (OTM) puts with a strike price of 107 points are available for a premium of 2 points. He purchases the put option as well.

By doing so, he enters into a “married put” position, as demonstrated in Exhibit 6 below. This position caps his downside risk at 4 points, which is the underlying futures price minus the strike price plus the 2 point premium. His potential upside is technically unlimited – although it is reduced by the value of the put premium that he bought for downside protection.

In this scenario, a trader is neither bullish nor bearish on the price direction of a hypothetical underlying Treasury future. However, she believes that there are upcoming geopolitical risks that will increase the implied volatility of the underlying and wants to profit from this potential move.

She notices that the underlying future is priced at 109 points, and that at-the-money call and put options with a strike price of 109 points are priced at 3 points for the call option and 2 points for the put option.

Because she believes that the hypothetical Treasury futures will experience increased volatility soon, she purchases both the call and put option. By doing so, she enters into a “long straddle” position, as demonstrated in Exhibit 7 below. This position profits the most when there is price movement in either direction and has the greatest loss when there is no movement in the price of the underlying.

This position caps her downside risk at 5 points, which is the combined price of the call and put options.

Transacting Weekly options on Treasury futures is simple when compared to the over the counter (OTC) swaption market. It is not necessary to negotiate ISDA Master Agreements and collateral support annexes (CSAs), which can be expensive and time-consuming. Plus, such agreements are often individually negotiated for each unique fund which further complicates the OTC transaction framework. Weekly options on Treasury futures do not need such an elaborate set-up.

The earlier examples highlight opportunities for asset managers and hedge fund portfolio managers. Investors, such as mortgage investors and others that deal with the swaptions market, can find good value in the extensive offering of Weekly options on Treasury futures.