# Block 010 — Yield vol / swaption surface

**Status:** ✓ done (2026-07-04, Session 15)
**Phase:** Phase 1 (Rates)

## Topic scope

How swaption vol prices rate-cut probability. ZN implied vol behavior pre-FOMC. Realized vs implied vol. Vol surface shifts (parallel, twist, smile). Vol-of-vol.

## Plan
## Plan

**Prerequisite:** Block 00a (rubric), Block 00b (anti-patterns). Swaption construction is a multi-leg trade with convexity; sizing references `risk-framework.md` v0.3 (200bp/trade).

### Pre-read (assigned 2026-07-03, Session 14 open — NOT STARTED, deferred to next session)
- Hull 10e Ch. 28 (Options on Bonds, Interest Rates and Swaps) — swaption + Black's model
- Hull 10e Ch. 31 (Interest Rate Derivatives: HJM and LMM) — swaption vol surface from caplet vols
- Castagna, *FX Options and Smile Risk* — Ch. 2 (vol surface definitions: RR, BF, ATM, delta space) + Ch. 3 (surface dynamics, vol-of-vol)
- Skip: Hull Ch. 29-30 (trees, short rate models — covered by user foundation), Castagna Ch. 1 (FX market structure — not rates-relevant)

## Session history

### 2026-07-04 — Session 15 (Block 010 complete)

**Pre-read compliance:** Hull 10e Ch. 28 + 31, Castagna Ch. 2-3 (assigned 2026-07-03 Session 14, completed by user before this session).

**Pre-block probes:** 4 plain-text probes. Q1 (swaption vs receiver/payer direction): Half-right with corrections — user said "put on bond" for payer, actual is call. Q2 (RR vs BF): Working with refinements on dealer flow interpretation and delta-space quoting. Q3 (Black's model intuition): "Don't know" — honest answer, full teach delivered. Q4 (probability extraction from surface): User initially missed the receiver-vs-payer question in the probe; corrected, then articulated the four-layer extraction (ATM vol → ATM receiver → 25Δ → RR/BF) cleanly.

**Main material delivered:**
- **Mechanics:** Swaption construction, payer vs receiver as calls/puts on bond, Black's model, annuity factor. Common trap: payer is a call on bond, not a put. Anti-pattern: "option hedge" without conviction on direction — every option is a view.
- **Surface structure:** RR (skew), BF (tail risk), delta space vs strike space, vol-of-vol. Each layer answers a more specific question than the last. Static vs dynamic measures distinction.
- **Trading the surface:** Extracting rate-cut probability layer by layer (ATM vol → ATM receiver → 25Δ receiver → RR → BF). Why rates vol is quoted in bp (normal vol) not % (Black vol). FOMC vol behavior and the vol crush trade. Anti-pattern: long Black vega + short vol-of-vol = lose money when vol rallies.
- **ZN surface rep:** Live data from Barchart (ZN ATM 5.42-5.62% Black) + Investing.com (TYVIX 4.71, -5.4% one-day). 73-day 1-sigma range = ±27bp in 10y yield, Black-implied probability of 50bp move = ~9% (vs empirical 20%+ — the vol-of-vol premium in action). 5-tier resource stack mapped (free CME tools → institutional Bloomberg → self-build QuantLib + pySABR + MiniKetch/vol-surface).

**Dialogue (carries forward to Block 011):**
- User asked for ZN surface rep (delivered with live numbers) AND practical resource recommendations (5-tier stack compiled and saved as research node).
- User caught missing Anki sync → AnkiConnect `sync` action called, 18 cards confirmed on AnkiWeb. Process change filed: every `addNote` batch ends with sync + count verification. Codified in `~/.hermes/skills/macro-book/SKILL.md`.

**Anki cards generated (Session 15):** 18 atomic cards on vol-surface mechanics + practical stack. Pushed via AnkiConnect + synced to AnkiWeb. Tags: `block-010 session-15`. Note IDs: 1783152276017 → 1783154320979. Breakdown:
- 7× mechanics/surface (swaption-mechanics, rr-formula, bf-formula, vol-of-vol, fomc-vol, delta-space, rates-vol-quoting)
- 3× Black's model (black-limitation, vol-of-vol-trap, annuity-factor)
- 3× rate-cut-probability (atm-probability, surface-extraction, normal-vol-rationale)
- 5× practical (zn-1sigma-conversion, tyvix-regime, monitoring-stack, cut-probability-tools, sabr-basics)

**Resource node:** `~/Obsidian-Macro/03-research/deep/volatility-trading-resources.md` — 5-tier stack (free CME tools, retail CrossVol, institutional Bloomberg/SQX, self-build QuantLib/pySABR, books) + cadence recommendations (daily/weekly/monthly/quarterly) + Block 010 anti-patterns.

**Status transitions:**
- **Rates — vol surface (RR/BF/vol-of-vol):** NEW Weak → **Working** (formulas, delta space, dealer flow, static vs dynamic distinction all landed; re-probe at Block 015 W27 verification or earlier if errors surface)
- **Rates — Black's model + limitation:** NEW Weak → **Working** (model mechanics, annuity factor, lognormality limitation, FOMC vol crush behavior all landed)
- **Rates — rate-cut probability extraction:** NEW Weak → **Working** (four-layer extraction, ATM → 25Δ → RR/BF framework, normal vs Black vol rationale all landed; re-probe Block 015)
- **Rates — ZN surface rep (live data):** NEW Working (73-day 1-sigma conversion, TYVIX regime interpretation, vol-of-vol premium all landed; first applied use of a live vol-surface dataset)

**Carry-forward to next block (Block 011 — MBS-Treasury basis / prepayment risk):**
- Pre-read already assigned in this session's close: Fannie Mae MBS Basics white paper + SIFMA MBS primer (~20 min, agency MBS pass-through structure, pool factor, WAC, WAM, PSA prepayment benchmark) + Hull Ch. 24 (Securitization) skim (~10 min, vocabulary). Skip detailed CMO/REMIC mechanics (Phase 2 territory if reached) and non-agency MBS (different risk profile).
- Block 011 opens with 00-05 pre-block probes: Anki retention check on Block 010 cards + cold recall on swaption/RR/BF/vol-of-vol/four-layer extraction. Per pre-read convention: 00-05 prefix regardless of whether Weak items surface in pre-probes.

**Process changes filed:**
- Post-Anki-card sync gate (mandatory `anki("sync")` + `findCards` verification after every addNote batch). Codified in `~/.hermes/skills/macro-book/SKILL.md`. Process-changelog entry at `~/Obsidian-Macro/90-archive/process-changelog.md`.

**Pointer:** Updated at end of session. Block 010 → done. Block 011 → next.

### 2026-07-03 — Session 14 (Block 010 open — pre-read assigned, deferred)

**Pre-block hygiene:** Pointer moved from Block 009 to Block 010 at Session 13 close. v0.3 risk-framework + v0.4 thesis template confirmed. No stale `_session-state/` files. Carry-forwards from Session 13 (operational, not study block) — GC-S/SLV-S/QQQ-S thesis.md rewrites, first weekly-review.md instance — noted as pending operational items, not session-blockers.

**Process gap surfaced and acknowledged:** Pre-read was supposed to be assigned at Session 13 close ("Will be named at session open" was a mentor-side failure to follow the session-close protocol). Insertion of 00a/00b/00c disrupted the routine; tightened back up after 00c was withdrawn. Lesson logged for skill patch — pre-read assignment is a session-close hard rule, not an open-session soft suggestion.

**Pre-block discussion:**
- User confirmed Hull 10e + CFA + university foundation covers mechanics (payoff diagrams, Black's model, basic trees, vol as risk greek).
- Mentor pushback: foundation covers mechanics, block teaches surface-as-tradeable-object, rate-cut probability extraction, swaption-vs-cap vol, pre-FOMC vol behavior — content the foundation doesn't cover.
- Pre-read assigned (compressed): Hull 10e Ch. 28 + 31, Castagna Ch. 2-3. Hull Ch. 29-30 + Castagna Ch. 1 explicitly skipped (foundation covers / not rates-relevant).
- User accepted pre-read load and opted to defer full block to next session.

**Material:** NONE. Block did not start.

**Anki cards generated:** 0.

**Status transitions:** None.

**Pre-read assigned (for next session):**
- Hull 10e Ch. 28 (Options on Bonds, Interest Rates and Swaps) — swaption + Black's model
- Hull 10e Ch. 31 (Interest Rate Derivatives: HJM and LMM) — swaption vol surface from caplet vols
- Castagna, *FX Options and Smile Risk* — Ch. 2 (vol surface definitions: RR, BF, ATM, delta space) + Ch. 3 (surface dynamics, vol-of-vol)
- Skip: Hull Ch. 29-30, Castagna Ch. 1

**Pointer:** Block 010 → NOT STARTED (pre-read in progress). Restarted from scratch this session (Session 15).