Fed to sell put options on Treasury bills

[Adeptus]

Behold the next Fed tool... Fed to sell put options on Tbills

[pksubs]

Re: Fed to sell put options on Treasury bills

nice video and presentation style! thanks for posting.

I like the part where the speaker indicates that once they get started selling put options, it's virtually impossible to stop, since a stop will be interpreted by markets as indicative of future default. It's pretty much where we are with QE3. This whole thing's become a bloody doomsday machine!!

[jk]

Re: Fed to sell put options on Treasury bills

if you buy a call and sell a put at the same strike price, you've created a synthetic long position in the underlying instrument. say you then sell short the underlying instrument. you now have a neutral position. so:
c-p -u =0
where c is the call you've bought, -p represents selling a put, and -u represents selling or shorting the underlying.

thus, -p = u-c

writing a put on a long bond, as the fed may be doing, is equivalent to buying the long bond while also selling a call on the long bond. it's a synthetic way for the fed to buy tbonds, while simultaneously writing a covered call on the position.

while buying bonds outright would put money into the system, selling puts supports the bond price while actually draining a little cash.

[Jay]

Re: Fed to sell put options on Treasury bills

if you buy a call and sell a put at the same strike price, you've created a synthetic long position in the underlying instrument. say you then sell short the underlying instrument. you now have a neutral position. so:
c-p -u =0
where c is the call you've bought, -p represents selling a put, and -u represents selling or shorting the underlying.

thus, -p = u-c

writing a put on a long bond, as the fed may be doing, is equivalent to buying the long bond while also selling a call on the long bond. it's a synthetic way for the fed to buy tbonds, while simultaneously writing a covered call on the position.

while buying bonds outright would put money into the system, selling puts supports the bond price while actually draining a little cash.

Super interesting and makes sense on many levels, thanks! Bernanke's sure got some tricks up that sleeve. Guess I'll hang onto my NLY.