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First One-Year Credit Index Option Traded

21 Mar 2006

The first credit index option with a one-year maturity was traded this morning in London. The trade is a straddle on the Series 5 iTraxx Europe with a March 2007 expiry and 50 basis points strike and Goldman Sachs, UBS and a third undisclosed counterparty were involved in the deal.


Matthew Reid, hybrids trader at UBS in London, confirming the maturity said credit structures with volatility exposure beyond the six month point are becoming increasingly popular with clients. "A longer-dated volatility market is an important step in the development of the structured credit business," he noted. Officials at Goldman declined comment.


Until now, only options with three-month, six-month and occasionally nine-month maturities. This is because players were unwilling to take long-dated bets on indices which change every six months.


Omar Syed, senior structured credit broker at ICAP which brokered the trade, said the advent of one-year option is symbolic of the growth in the market and should act as a catalyst for the longer dates structured products linked to credit volatility. "Now there is more scope for hedging long term volatility views," he noted. Syed declined to name the third counterparty.

21 Mar 2006