End users, such as in the Australian equity market have been using collars and other derivative strategies to lock in gains resulting from the domestic equity market's dramatic appreciation over the last several months. Since March, the All Ordinaries Index has climbed from lows around 2,744 to highs near 3,330. Last Wednesday the index closed at 3,274.
"Generally, volumes in the OTC market have much improved relative to the rest of the year," said Greg MacKay, head of equity derivatives at Macquarie Bank in Sydney. Dealers explained that for instance, OTC collar plays on indices and individual names, including AMP and BHP Billiton, have picked up by over 20% in recent weeks, mainly driven by domestic and offshore funds.
One equity head at a bulge bracket house said hedge funds have been looking to lock in gains from this year's rise in equities over the course of the year, given the market's recent consolidation, as the index has retraced to around 3,243.
MacKay explained that in a typical collar, an investor buys puts struck at 80-90% of spot, funded by selling calls struck around the 110-120% level. Stephen Richards, head of equity trading and risk at Commonwealth Bank of Australia in Sydney, noted that interest in such plays is also picking up with its institutional investor clients and high-net-worth individuals, along with structured equity products.
