-38-
spreads and thereafter closing these positions by “buying” vertical
put spreads.33
Credit Option Spreads
Part of Tandrill’s trading strategy was to purchase Treasury
bill put options at one strike price and sell the same amount of
Treasury bill put options at a higher strike price for the same
maturity month.34
Mr. Borst provided an example of the type of credit spreads in
which Tandrill engaged. On September 20, 1979, 6 December 1979
Treasury bill futures contracts were “sold” by the trader at 90.25
and 90.26, and 11 March 1980 Treasury Bill futures contracts were
“sold” by the trader at 90.89. Also, a total of 47 March 97.50
puts were “bought” for a total price of $1,153,991, and 47 March
97.625 puts were “sold” for $1,178,995. The credit on the options
positions was $25,004.
33 Each option was on $1 million face value Treasury
bills; the minimum price movement was $.01 ($100). The
underlying Treasury bills’ maturity date depended upon the
expiration date of the option. The usual maturity date of the
Treasury bills was about 3 months after the expiration date of
the option.
34 The year 1979 was an extremely volatile period for
interest rates in the United States. Rates were increasing
rapidly into September 1979 and during that month. Tandrill’s
strategy in this regard provided some risk control in the event
that Treasury bill interest rates that had been increasing began
to decline. If interest rates fell, the price of the short
Treasury bill futures positions would increase, thereby creating
losses for Tandrill.
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