Interest Rate Options decrease, increase, interest, position

LBriscoe

From my limited understanding and from reading the CFAI text, i'm trying to conclude what the types of interest rate options and their impact on Duration of a position.

My understanding is that options can have either (1) interest rate or (2) a bond, as the underlying to an option, so the respective impact of rate changes are

Interest Rate as underlying (increase in rate effect)
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- Long Put - decrease in value - Used to increase Duration of portfolio
- Long Call - increase in value - Used to decrease Duration of a portfolio
- Short Call - increase in value - Used to increase Duration of a portfolio
- Short Put - decrease in value - Used to decrease Duration of a portfolio

Bond as the underlying (increase in rate effect)
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- Long Put - increase in value (underlying decreases in value) - Decrease duration of portfolio
- Long Call - decrease in value (underlying increases in value) - Increase duration of portfolio
- Short Call - decrease in value - decrease duration of portfolio
- Short Put - increase in value - increase duration of portfolio

I want to make sure my understanding is correct, can someone say whether they agree or not?

ll11

Incorrect I believe. Have a look at what you're written again.

Just in terms of value to your portfolio:

1. Rate

If long a put and rates rise, option value falls, portfolio keeps upside sensitivity
Long a call and rates rise, option value could rocket. Portfolio overall however doesn't gain any upside sensitivity.
Short a call: If rates go to the moon it's brown trousers time.
Short a put: No change in PF value (well, small increase) as rates rise. You pocket the premium and go to the lappies after work.

2. Bonds

Long put&increase in rates: You don't lose $$$
Long a call&increase in rates: option value falls
Short a call and interest rates rise. Pocket premium, you don't lose $$$
Short a put and rates rise: Brown trousers time. Loss capped at value of underlying.

Colum

Seems like GoneFishing (allepourpecher) disagreed with eadesr, then made the exact same argument.

INTEREST RATE RISING
if long put, option value falls (so does portfolio) hence duration was increased
if long call, option value increases (portfolio falls) so you have made the net decrease in portfolio smaller. That sounds like duration decreased.