Derivatives shops, including JPMorgan, Deutsche Bank and BNP Paribas, are starting to market options on tranches of synthetic collateralized debt obligations, according to officials at the firms. The products are aimed at both so-called real money investors, such as insurance companies, that want to earn carry while they are waiting for spreads to widen, and hedge funds that want a cheap way of trading CDOs.
Peter Lintott, head of structuring and execution on the credit hybrids trading team at JPMorgan in London, said real money investors could sell options to earn premium in anticipation of spreads widening and put their cash to work in other assets classes.
Hedge funds likely will snap up the products, predicted Michael Fuhrman, a market specialist in credit derivatives for GFI in New York. "What does a hedge fund like better than leverage? Infinite leverage," he said, explaining that hedge funds will now be able to use capital more efficiently because they can take exposure to CDOs simply by paying a premium. Scott Eaton, co-head at Winchester Capital Principal Finance in New York, said it would it be interested in entering options to express market views.
JPMorgan's Lintott said it would likely start publishing prices for short-dated options referenced to the TRAC-X credit derivative index in the coming months because this has the most chance of developing into a liquid market. It will also, however, price options on single-tranche deals on a reverse enquiry basis.
