Growth in the European credit options market is stagnating this year because a combination of wide bid/offer spreads and a lack of liquidity deterring new players using the instruments to hedge investments. Traders say long-only and bond-fund managers are yet to enter the market in large numbers. "It's a chicken and egg situation," said one official, noting these funds are needed to inject liquidity and drive down prices. He speculated funds could use credit options to buy protection on portfolios up to EUR3 billion in size.
Traders declined to name specific bid/offer spreads or where they should be trading because they can differ considerably between dealers, but all agreed they appear inflated. At present, activity in credit options is dominated by directional investors who use options to take bets on the iTraxx indices. Last year there were also trades on single names in Europe, but this has dried up because players have shied away from carrying the short side (DW, 1/6).
