Treasury Volatility Bet Is Paying Off as Blue Wave Hopes Fade

A large option wager that Treasuries will see less volatility than many had expected over the U.S. elections is paying off.

The bet was simple. A short position was built up in a so-called strangle on 10-year Treasuries -- a pair of upside and downside options -- which generated more than $31 million in premium.

It pays off if 10-year bond yields remain between 0.65% and 1% to the options’ expiry on Dec. 24. A break out in either direction though could have left the volatility seller with potentially unlimited losses.

Treasury Volatility Bet Is Paying Off as Blue Wave Hopes Fade

The valuation of these options have collapsed as early polling results suggest that a Democratic sweep of both the presidency and the Senate, the so-called Blue Wave, is unlikely to happen. That’s left yields at around 0.8% as expectations for aggressive fiscal-spending plans from the Democrats are unwound.

As a result, the contracts are worth just $25 million, according to Bloomberg’s calculations, meaning the trader has realized a gain of over $6 million.

Not bad for a two-week wager.

©2020 Bloomberg L.P.

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