You're watching...
Nasdaq Executive V.P. Eric Noll on how investors can use Treasury options to hedge or generate income.
Also in this playlist...
Auto-advance: ON
Auto-advance
This transcript is automatically generated
Derivatives risky right treasuries.
Say.
Right is there a way to meld the two to help you make money.
Treasuries have been in a bull market for the better part of twenty years but yields lately have been plummeting near record lows of -- staying there.
Just last week Goldman Sachs president and chief operating officer Gary Cohn told me the potential blow for rates to reverse and suddenly jump higher.
Could cause a little bit of Catholic here's what he -- If people need liquidity prior to duration prior to the end of their bond maturity.
They may be surprised to find out they don't get a 100% of principal back and I am very concerned about that.
There's a new trade and town if you're concerned about it -- when you want to bet on that very move today the NASDAQ launches options trading on safe haven US treasuries individual ones.
Giving you a new way to play interest rates joining had to explain his -- know he's NASDAQ traded services executive vice president.
This is a way to wager on the moves of the ten year and the thirty year correct.
Yeah it's not just to wager but it's also an -- Hedging instrument that you can use to protect your exposure so if you already -- the ten year worth thirty year or want to own the ten year -- thirty year -- actually -- -- generate more income.
This is -- classic options tool to help you manage your risk.
Expose yourself to more risk.
Protect yourself as rates start to move -- Now in the past you were able to do.
An option on say the TBT or -- TLT which are ATMs that can allow you to do this on treasuries but.
This is different tell us exactly how -- this is different in two ways one is the -- -- in the other options on ETFs are actually options on an ETF which represented a basket of treasury securities -- These are very specific options on the current on the run bonds that are issued every quarter.
By the US government to fund themselves so they are what we would call -- -- specific.
So they are the bonds that are actually issued by the federal government this quarter where the most liquid bonds that are out there four traders trade.
We're explaining how it works so in essence you can buy 101000 dollar contracts tied to ten individual bonds with a face value 1000 per bond correct and what happens let's just say give people in a hypothetical.
Rates move from 2.0 2% which is where they are today to -- just throwing -- out their two point 89.
So it's your bond goes down in value as rates go up.
You can buy -- put protect yourself from the lower than the bond values going down or if you think rates are going stay the same or go up.
Are hard or go down in your bond values can go up you can buy call options on that.
You can use a whole variety of options it's it's straddle or spread strategies to protect yourself from -- Can actually generate more income by owning a bond and selling a call option over top of.
So when US treasuries are -- the once -- you can actually buy are the most liquid.
-- in essence issued every quarter and against individual because these have become extraordinarily popular bonds the tenure in the thirty.
Yet the on the run bonds the ones -- the federal government uses to fund every quarter are by far the most liquid securities trading out there in the markets today and there is not currently a transparent two -- Visible centrally cleared product out there to hedge your exposure to these products this is the first product like that define the term on the Ron.
So on the run essentially means those bonds that everyone is now concentrating on and so on the run essentially means every quarter when the federal government issues new intends 36 -- Those become the on the run bonds.
-- the risks we always want to let our investor viewers know about the risks let's say the Fed decides QE 45.
You name it what's the risk if you have if you believed that rates would jump higher and you bought this particular option.
So if you believe rates were gonna jump higher you just like any other option trade you have exposure you have risks and any -- just like every other option trade you have out there.
So these are for sophisticated investors who understand the risks that they're trading.
But generally the you know what we would say is you can you -- to hedge yourself against those kind of risks.
But sudden shocks and interest rates when -- -- earlier commentators this afternoon just talked about volatility coming back in the interest rate market.
This would help you protect and manage that volatility by owning or using these products to hedge your exposure.
Right now it's in essence a test run with the -- thirty will you eventually expand to the entire yield -- yeah our our goal here is to expand across the entire yield curve and then eventually start to add other products onto it if these are successful.
This is going to be successful for the NASDAQ I would imagine this was nine months in the making your timing looks really good.
Yeah I think we got a little lucky with the timing really happy about that yeah it all weird how it -- rates are gonna jump at some point because the economy's getting better right.
Good to see America -- for being here to explain on our countdown college Erica all of NASDAQ executive vice president of trading services they have a name.
No they're just options on US treasury okay.
Cuts could come up with a fancy.
