Bond Options are Derivative Contracts that give investors the right, but not the obligation, to buy or sell a Bond Future Contract on a future date at a fixed price. Call Options give investors the right to buy the underlying Bond Future. Put Options give them the right to sell it. Bond Options are cash settled and easy to access through a JSE Debt Board member , However, if Bond Options are held until expiry, the Bond will be delivered physically, in terms of the underlying Future.
Who is this for?
Bond Options are traded by professional and private investors seeking cost-effective exposure to Bonds. Hedgers can use Bond Options to protect an existing Bond portfolio against adverse interest rate movements. Arbitrageurs use them to profit from the price differentials of similar products in different markets. Speculators use Bond Options in the hope of making profit on short-term movements in prices. Some investors use Bond Options to enhance the overall performance of a portfolio.
- Gives private investors exposure to South Africa’s Bond Market;
- No obligation to buy and sell the underlying Bond Future;
- Can be used to protect an existing portfolio from adverse interest rate movements or enhance the performance of a portfolio over time;
- Allows you to take advantage of price movements in Spot Bond prices because they can take a view as to whether they will increase or decrease;
- Elimination of counterparty risk through trade of standardised contracts on a regulated exchange;
- Only required to post the initial margin upfront as the premium of the option is paid over the life of the option instead of upfront.
- Trading Futures can be risky. Private investors can lessen the risks of trading by ensuring they have a high degree of product knowledge, investing within their means and dealing with experienced brokers.
How to get Bond Options
To trade Bond Options, investors need to become a member of the Interest Rate and Currencies market or register as a client with an authorised JSE Debt Board member, deposit the required initial margin and sell or buy according to your needs.