Merrill Lynch has started trading options on corporate bonds. "Bond options give a new dimension to investment strategies," said Chris Francis, head of international credit research in London, adding that they offer a less linear payout to bonds or default swaps.
The firm is pitching covered call and put strategies to investors. For example, investors considering selling bonds can sell call options to generate premium. If investors do not receive as many bonds in a new issue as they had hoped for they can sell puts to gain more exposure.
Francis said these products are a natural step from credit-default swaps. He noted, however, that the bond options market is unlikely to become as large as the credit-default swap market.
