Trading volumes in options on credit-default swaps have rocketed in recent weeks after the underlying market has become rangebound. The directionless market means investors are shying away from paying the full cost of default swaps to make fundamental bets. One credit derivatives trader estimated that option volumes have doubled.
Alex Reyfman, credit derivatives strategist at Goldman Sachs in New York, observed that investors are increasingly looking to options on default swaps as a means of generating premium. An example trade would be to sell a call on a default swap on Safeway, giving the option buyer the right to purchase five-year protection on the corporate at today's strike price should spreads move wider. Options typically have a six-month maturity, he added.
