Credit options have gained traction this year thanks to growing investor preference for taking short-term views. Officials say a liquid, two-way market for the instruments is in sight due to increasing demand from clients for short-dated credit plays, rather than buying bonds or selling credit protection, typically liquid at five-year maturities.
An average of about USD2 billion notional traded on the options mart every month this year, according to traders. This is an increase of between five and 10 times from 2004, said David Pasquier, credit products manager at JPMorgan in London, adding his firm has traded between USD35billion and USD40billion in 2005.
Sophisticated trading accounts have also fueled growth, using the instruments to speculate on the volatility of the iTraxx and CDX credit indices. "The number of market participants in this area has grown considerably," said Hector Garcia, credit options trader at The Royal Bank of Scotland in London. The downgrades of General Motors Corp. and Ford Motor Co. sent volatility soaring to around 70%, from around 20% the previous month, and options trading volumes hit an estimated USD2.75 billion notional that month.
Growing demand for the instruments has also led to technical improvements. A handful of dealers started offering monthly expiries in the second half of the year, alleviating pressure on traders to exercise huge volumes of options on quarterly expirations (DW, 9/27). Other developments are on the cards for next year, said dealers, who expect to see more firms offering longer-dated or out-of-the-money options.
