Yield-Based Option

Yield-based options are of the European variety, meaning they can only be exercised on the expiration date (rather than any time up to the expiration date, like American options). Having a yield-based option means that you bought a contract that gives you the option to buy or sell the underlying debt instrument, depending on whether you bought a yield-based call or put option.

You can make cash off of a yield-based option if there’s a difference between the exercise price and the yield of the underlying debt instrument in your favor. If you’re on the wrong side of the table, you’ll lose money. There are call options and put options, depending on which way you want to wager.

A yield-based call option is for the buyer who expects interest rates to go up. If that happens, the buyer is “in the money,” which means they should exercise the option to make a profit. A yield-based put option is for the buyer who expects interest rates to drop. If they do, they’ll also be “in the money.”