Trading of options on variance is picking up and the range of indices underlying the options is tipped to expand. According to dealers, the pickup in implied volatility since May has kick started a new round of innovation in variance instruments, which can be used by players looking to express views on implied volatility.
One inter-dealer broker in New York said he has received enquiries for options on Nasdaq Composite variance and for Russell 2000. Several dealers agreed there has also been client demand for both indices, although it could not be determined if any options on Russell variance have been priced.
Most major equity derivative dealers are now offering options on variance, with the Standard & Poor's 500 and Euro STOXX 50 the most popular underlying indices. Short-dated options with December 2006 expiries are the most popular, explained one official, who noted the last few months' volatility has also seen trade sizes pick up. He added Nasdaq and Russell variance options will likely gain momentum although he noted it will depend on how many firms get behind the instruments as liquidity providers.
