Conditional Trades

This chapter considers a common class of trades in the fixed income markets known as conditional trades, which combine concepts from the underlying rates and options market to express views on the directionality of either spreads or curves with rates. Conditional trades use options to take views on the curve or swap spreads only in certain interest rate scenarios and expire worthless in others. Conditional trades are a mixture of underlying rates concepts and options and utilize details of both to take a specific view. Conditional trades are one of many possible ways to combine the instruments and concepts discussed in this book to take views on rates in more intelligent ways than just outright buying and selling treasuries. At times, the outright trade may be the best one, but many times controlling for extraneous risk factors that do not form part of the view results in higher risk‐adjusted returns. It is important for investors to be on the lookout for interesting ways to structure trades that are efficient from a carry, relative value, or risk perspective while still maintaining the original intended view of the trade.