Fund managers are getting more interested in so-called cash extraction trades as a result of a recent run-up in equity prices, according to equity derivative. In the deals, the managers sell stocks they hold to pocket gains and buy single stock options to maintain upside exposure. Institutional clients, particularly insurance companies, are taking the view there is still potential for stock gains but they want to limit risk to option premium, rather than holding the stock, said one flow salesman.
Larry Chen, equity derivative analyst at UBS in London, picked out several single stocks where cash extraction plays might work, including names such as Prudential, Accor and IBM. The simplicity of the trade is part of its appeal, he noted. The flow salesman said hedge funds have also been buying certain single stock call options in large volumes, declining to name which funds and which stocks.
