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Credit Option Vol Slumps

24 Aug 2006

Option-implied credit volatility is following the lead of high-grade and high-yield credit spreads and drawing in to three month lows.

Option-implied credit volatility is following the lead of high-grade and high-yield credit spreads and drawing in to three month lows. This is despite the credit markets being hit by economic and political pressures including interest rate uncertainty, political turmoil in the Middle East and high oil prices.

Implied volatility for at-the-money September options on the iTraxx Main dropped 2% last week to 32%, a full 11% tighter than a month ago. Similarly, CDS spreads on the iTraxx traded as low at 27 basis points Friday.

One trader said the dip in volatility had not had a huge impact in the volumes of credit options traded. The growth of the market has been hindered this year by low liquidity (DW, 3/3).

24 Aug 2006