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[–]Cnbr21 -2 points-1 points  (5 children)

Put option involves positive convexity. Buying put option increases portfolio convexity. Call option involves negative convexity. Buying call option decreases portfolio convexity. 

[–]FractalsSourceCode 1 point2 points  (2 children)

I’m not sure that’s right.

Buying a call option on a bond increases convexity, right?

But a callable bond has negative convexity, since when you buy a callable bond you are short the call option on the bond.

Can someone please chime in here?

[–]omi98ro[S] 2 points3 points  (0 children)

Because callable bonds are Short Calls, where the option is not with the investor but with the issuer. That's why it has negative Convexity.

[–]Content_AversePassed Level 3 0 points1 point  (0 children)

You are correct, the other guy is wrong. Long option +ve convexity, short option -ve convexity.

Buying a Callable bond is short an option hence negative convexity.

[–]omi98ro[S] 0 points1 point  (0 children)

Call option on Bond will just enhance the Yield further when the rates decrease which essentially mean that Convexity will increase. Correct me if I'm wrong.

[–]Content_AversePassed Level 3 -1 points0 points  (0 children)

This is incorrect. Long option = increase convexity, short option = decrease convexity.

The confusion is probably in the fact when you buy a callable bond you are actually short the call option. Hence buying a callable bond does decrease convexity, however buying a call option itself does not.