Options on the CDX American corporate index are being used as a reliable signal of the market's sentiment--a sign of the maturing of the market. This was evident at last month's index roll, when for the first time spreads on the retiring index widened, rather than tightening. CDX-market watchers attributed this to a rush by credit players to buy up cheap protection on CDX 6--the old index--because CDX options were indicating the majority of the market was positioned for CDX 6 spreads to tighten and CDX 7 spreads to widen.
Just prior to the roll of CDX 7 at the end of September, the market was flooded with investors looking to buy receivers--options to sell protection--between two weeks and one month in the future. Savvy investors who watched the options market closely took advantage of the discounted position on the other side, to buy up protection on CDX 6, in turn prompting spreads on this index to jump. "So many investors put on the same bet that the market responded and did just the opposite," explained one options trader. CDX 6 was at around 180 on the roll and it remains in a range at roughly 177 today. The on-the-run CDX 7 was trading at 166 last Thursday, as DW went to press.
