The credit options market in Europe has grown 10-fold through the end of the third quarter, driven by growing investor preference to take short-term views on underlyings rather than buying a bond or selling credit protection. A small group of sophisticated credit investors are also using the instruments for pure volatility trading, betting on changes in implied volatility of the iTraxx index.
Daniel Berman, credit products manger at JPMorgan in London, said his firm has traded USD25 billion in notional since January. "Credit options have definitely been the biggest news in the flow space this year," Berman said, adding he expects volumes to again swell in the fourth quarter. Traders at firms including The Royal Bank of Scotland, Barclays Capital and ABN AMRO have also reported a boom in trading volumes.
The majority of credit options are bets on the iTraxx or CDX indices, but the number of trades which reference single names is climbing, according to market players. High-yield U.S. names including autos and airlines are currently the most liquid.