Some in the loan-only credit-default swap market suggest the ability to place a credit option on LCDS will develop in 2007. According to DW sister publication Credit Investment News it is anticipated this could pick up once the LCDX index develops. Some dealers had hoped the index would be ready by the end of the first quarter, but now it looks like it could be sometime in April or May.
Options can trade on single-name unsecured CDS, but they are illiquid. Options on CDS indices, however, are common, and as one dealer explained, "There's no reason that we won't have options on the LCDX that trade once [that] index is trading as well." Details of the index are still being thrashed out but it is expected to consist of 100 names and be cash settled, unlike the single-name swaps which are physically settled.
One dealer said a potential hindrance to the development of an options market could be a lack of spread data, which is needed to calculate volatility and so price the options. "Pricing options on LCDS may be difficult due to the lack of spread history," another dealer said.
