Price-Based Option

Commitment is hard. We like to keep our options open. That’s what options are for.

In particular, a price-based option is an option that’s based on the price of the underlying debt security. Most price-based options are based on bonds, and they’re not too popular compared to other options in the space. That’s because yield-based bond options are usually more in line with what people are looking for...based off the yield, rather than the price, of the bond.

Here’s how it works: the holder or a price-based option can (if they want to, by the expiration date) buy (a call option) or sell (a put option) the underlying debt security, at the strike price, which is agreed upon beforehand. As with other options, investors use price-based options either to hedge against risk, or to try to make money off of the spread via speculation. If the price-based option is a bond, it means hedging against changes in price of Treasury securities.

Feeling “secure” yet?