An upsurge in mergers and acquisitions has breathed life into single stock derivatives, prompting equity houses to start talking of a year of record profits. Equity sales officials are reporting increasing buying interest from asset managers and multi-strategy funds, which have not previously been equity derivative customers. While sophisticated equity trading accounts have been playing the single-stock upsurge for the last year, the addition of new players to the fray has got the Street buzzing about a bumper year.
"Single stock equity derivative volumes have exploded relative to index," said Tim Hart, head of equity derivative sales for Europe at Deutsche Bank in London. "There's a renaissance of interest in equity derivatives, particularly single stocks, from asset managers," he added. Earnings season is also adding to the boom, sparking heavy interest in plays linked to Siemens, Nokia and Royal Dutch/Shell, for example, in Europe.
A single-stock trader explained the other bonus for dealers is that the new entrants to the market are increasingly receptive to buying over-the-counter stock options, rather than sticking to listed instruments. One flow salesman said popular plays are risk reversals, or other structured plays which offer leveraged exposure to single stocks, with an upside barrier to make the instrument cheaper. Although some equity analysts are saying the risk of takeovers and mergers is being overpriced, particularly for mid- and small-cap stocks, OTC sales pros are punting answers to this, too, such as outperformance options on small- and mid-cap indices.
The booming single stock market means traders are in high demand and several firms including JPMorgan have been hiring. Lehman Brothers and Morgan Stanley are reportedly also on the lookout for traders, but officials at these firms declined comment.
