U.S. equity derivatives dealers are seeing a pickup in interest from hedge funds and prop desks in one-by-two put spreads on the Standard & Poor's 500. In a one-by-two put spread, investors sell twice as many lower-strike puts as buying upper-strike puts, to express a view realized variance and volatility will remain low and range-bound. The premium made from selling the puts reduces the cost of the trade in the event realized variance rises. Dealers are becoming more comfortable with the product and are able to offer larger trades at tighter spreads, and clients are responding to the view that realized vol will remain low and in range. One trader said USD2 million of put spreads traded last week.
One-By-Two Put Spreads Pick Up
