QuoteOriginally posted by: wickedwitIt is incorrect because swaptions are priced off of forwards. The current Swap curve and treasury curve is positively sloped and thus has forward rates that are higher then spot or par rates (the on-the-run swap rate). So your ATM put option strike on the 10yr swap rate in 1 year will be higher then the current spot rate. In 1 yr if nothing changes and you are left with your put option (payer) it will not be at the money like it was when you struck it, it will be out of the money. So, say the current spot 10yr swap rate is 2.15, and your atm payer swaption was struck at something like 2.20, in 1yr the 10yr swap rate is still 2.15 if nothing changes and you essentially experienced the roll down.Totally agree with this and with that we have a volatility roll down (as our theta changes).However, just to make myself clear, at the beginning of the conversation secret2 mentioned that he wanted to bet at ?5y and 10y points on the curve?, and I wanted to make clear that with swaptions (and with CMS) we can have our position (PVO1) at these rates as time goes on, and not worry about ?sliding cost?.

I don't think that i agree with what you're saying. You say you agree, but im saying that a position in swaptions does have a slide cost for the reasons that i gave. The only difference is that i called it rolldown. So yes swaptions have a slide cost and although im not really that familiar with CMS swap something tells me that they do to because as someone else said you rarely get anything for free in such markets. So that's the answer.

At the first message, it is clear that secret2 is worried about roll down of the swaps. He mentioned the expression sliding cost to describe it. In IR trading when we are using the expression carry and roll down, we are referring in general to swaps because these are the most liquid products. We look at the shape of the swap curve and we see how our pnl is going to be affected as time goes. I wanted to make clear to him that by using swaptions to the put your steepener trade, you don't do that.With swaptions we do have the rolldown that you described and the vol rolldown that was mentioned earlier, however, the question was basic and I did not want to get into that.