Hedge funds and dealers in London are beginning to trade options on equity baskets against options on the component stocks in the basket. The trade is a precise way of hedging the correlation axe European houses have built up by effectively selling equity basket options in their structured products business. One inter-dealer broker explained these trades have been boosted by improving liquidity of single stock options as more players enter the equity derivatives market.
"This is a big thing right now," said one dealer at a U.K. house. But he noted playing the baskets and component stocks is unlikely to reach the volumes of dispersion trading through index and single stock variance swaps, which has rocketed in the last year (DW, 2/25).
