Equity derivative houses in London, including JPMorgan, Deutsche Bank and Barclays Capital, are racing to price options on implied volatility, following the development of options on variance over the last few months (DW, 10/1). Bank of America in New York has reportedly already traded some options. Hedge funds are interested in the instruments and traders said it could also be possible to roll out the products for retail clients as warrant.
Tim Hart, managing director in equity flow derivatives at Deutsche Bank in London, said, "The market is very keen for [volatility options] to develop." Hart explained variance options have a payout that is the square of volatility, so options on volatility would appeal to clients who don't want to manage the convexity of the variance-linked payout. Hart estimated it could be six to 12 months before the options are actively traded.
