bkballa

You are simply mixing up the strike price with the interest rate.. your strike price is the price of the underlying... and as you remember, the price of the bond has an inverse relationship with the interest rates..

so, like willispierre said, the price of the bond will go down as interest rates rise.. hence, you protected yourself from falling prices.. in your example, you said that the price went down from 100 to 50; well, that's because interest rates have gone up.. and when you exercise your options, your payoff will offset the loss in bond value..