March 25, 2007
A swaption is an option to enter into a swap at some future date. A payer swaption is an option to pay the fixed rate, and a receiver swaption an option to receive the fixed rate.
A straddle is an option trading strategy that involves buying a put and a call at the same strike. If the underlying goes up, the call is profitable. If it goes down the put is profitable. If there’s little price movement the premiums likely constitute a loss.
A swaption straddle is a payer swaption together with a receiver swaption. If floating rates go up, you chose to pay fixed. And if floating rates go down you chose to receive fixed. And if rates don’t move, game over ! Would you like to play again ?