Let's now have a look at the combinations we would trade to express any conditional curve view.

Note, we always trade the same type of swap in each case, either two payers or two receivers, and the combination would be sized to be delta neutral on trade to date.

For bearish curve plays, we trade payer swaptions, and for bullish plays we trade receivers.

For example, a bullish steeper is created by buying a receiver on short swap tenor and selling a receiver on a longer swap tenor.

For example, buying a one month, 10 year receiver and selling a one month 30 year receiver both with at the money strikes would be a bullish steepening view on the 10 year, 30 year spread, which you expect to be realized over the next month.

You may be wondering why we would go to this trouble when there is a simpler trade using swaps that we could execute, which doesn't require the conditional, bearish, or bullish element.

One reason could be that a richer view is able to be expressed.

That is we are able to say something like, I think if rates increase, the curve will flatten.

However, if rates decrease, the curve may steepen or remain the same shape With swaps, one can only trade one element of this.

The curve shape with swaptions one can isolate the bearish flattening outcome and not be exposed to loss if a bullish steepening occurs.

Another reason is that the shape of the volatility surface may offer the opportunity to improve the initial curve spread entry level, or to net receive premium on trade inception.

To use a bearish flattener example, let's say that volatility on 10 year swap tenors was higher than that of two year swap tenors, the trader would be buying the lower vol and sell the higher vol and could exploit this difference to improve the strikes of the two options to create an in the money starting position for the flattener.