Option-Adjusted Spread
Option-Adjusted Spread — Spread adjusted for embedded prepayment options in callable bonds and MBS.
Definition
Option-Adjusted Spread refers to spread adjusted for embedded prepayment options in callable bonds and MBS. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
Duration, curve, and carry decide whether a macro view survives into P&L. When spread adjusted for embedded prepayment options in callable bonds and MBS shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what option-adjusted spread is saying. If spread adjusted for embedded prepayment options in callable bonds and MBS moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Always state the tenor and roll-down assumption; parallel-shift shortcuts hide curve risk. Prefer a short written null hypothesis for Option-Adjusted Spread: what would falsify the current reading in the next window?
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