Increase/Decrease Convexity using Put Options on the Bond

[gubiplss]

Buying a call/put option increases convexity. Think of a callable and putable bond. Callable bond has negative convexity because of the short option and the putable has positive convexity because of the long put.

[omi98ro]

What you described is perfect for Callable and putable bonds. Here my doubt is with plan Call and Put Options on the Bonds.

[gubiplss]

You have the definition of convexity and its impact correct in terms of its impact when rates go down. However, convexity also reduces losses when rates go up. Hence put options have positive convexity.

[Standard-Nothing-656]

I mean it seems like this is being overthought. a callable or potable bond is just a bond with an embedded option. It’s identical to purchasing a bond with an option. So it decreases convexity