Swaptions can also be used in steepening and flattening trades.

Instead of expressing the curve view using bonds or swaps, a trader can use swaptions to add an extra parallel curve element, sometimes called a conditional curve trade.

Here we have a two year versus 10 year at plus 25 basis points using swaps.

A trader who wished to express a curve flattening view would sell the spread at plus 25 by paying fixed on two year swaps and receiving fixed on 10 year swaps in delta neutral sizes.

Now, let's say the trading view is that the curve flattens and moves higher, what we would call a bearish flattening.

This view can't be expressed using swaps whose delta will remain broadly constant as yields move higher.

However, using swaptions, we can trade this view by exploiting the fact that our delta will increase or decrease as the options move in or outta the money.

To illustrate with an example, let's say our trader buys a six month, two year payer swap and sell a six month, 10 year payer swap option, both with at the money strikes, the trades will be sized to make the combination delta neutral.

Now imagine that in six months time, all rates are higher and the curve has flattened.

That is the two year rate has moved up by more than the 10 year rate.

In this case, the trader will win because the payoff from the six month two year payer will exceed that of the six month, 10 year payer.

In a different scenario where the curve flattened, but all rates went down, then both options would finish out of the money and produce no payoff.

Hence, this trade being a bearish curve, flattener.