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Short-Dated Conditional Outperformance Options Emerge

Conditional outperformance options, which started to hit the Street over the summer, are being tweaked to offer investors shorter-dated plays.

Conditional outperformance options, which started to hit the Street over the summer, are being tweaked to offer investors shorter-dated plays. In the options, the buyer receives the performance of one equity index or stock basket over another for the days it meets a certain condition, such as staying within a range.

These have mostly been sold with maturities of six months to a year (DW, 9/1), but now dealers are offering clients one- to two-month options. "People are even asking to have more weekly options," reported one hedge fund salesman in New York. He noted once his firm had got comfortable with the structure it was able to hedge the shorter dates just as well as the longer dates.

Most of the buyers for the options are hedge funds and the instruments are structured on a one-off basis for each customer, explained a dealer at another firm. It appeals to the funds as a correlation play on the relative performance of equity indices, he added.

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