Let's now have a deeper discussion about how swaptions can be used by speculators.

Directional trading is the first obvious example.

Use a payer swap option to express a view that swap rates go higher.

The swap option may also give a speculator the chance to trade a compound view.

For example, that rates go down and as they do, implied volatility will increase.

In this case, buying a receiver swap option will lead to a double win, as both the decline in rates and increase in vol both increase the price of the receiver.

This speculative view can only be expressed using swaptions.

Using swaps instead would just give a one dimensional outcome driven only by the move in rates.

Like in other markets. It is common to combine swaptions together to create a more complex speculative view.

Payer and receiver spreads are used to reduce the upfront premium of a directional view.

For example, buying a payer spread where you buy a low strike payer and sell another payer with a higher strike, gives a reduction in premium in return for limited upside potential.

Suiting those with a moderately bearish view on rates.

Note bearish here refers to rates going up.

That is bond prices going down.

In the same way, receiver spreads can be used to express a moderately bullish view on rates.

Straddles and strangles can also be created by combining payer and receiver swaptions.

These combinations are used to trade volatility rather than direction.

For example, a trader who thinks volatility will decrease that is the market will be calm and swap rates will not move much may like to express that view through a short straddle or a short strangle trade.

Butterflies and condors can also be created as in other option markets where straddles and strangles are combined.

It is also common to trade views on the characteristics of the price distribution.

For example, how fat tailed or skewed it is likely to be using butterflies and risk reversals.

A risk reversal being where payers are traded versus receivers long one and short the other.

Whereas in foreign exchange or equities where all expires share the same underlying with swaptions, there is a matrix of available expires and underlyings, and consequently, liquidity can be spread a little more thinly.

Generally speaking, the liquid expires will be one month, six month, one year, two year, five year, and 10 year into each Of the usual liquid swap tenors.

So for example, six month, five year, one year tenure, year, five year, five year are all liquid points in the swap option matrix.

Something like seven year, two year less So.