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Single-Name Options Mart Vanishes In Europe

06 Jan 2006

The two-way market for single-name credit options has dried up in Europe because players have shied away from carrying the short side.

The two-way market for single-name credit options has dried up in Europe because players have shied away from carrying the short side. Traders said liquidity disappeared when the downgrades of General Motors Corp. and Ford Motor Co. sent volatility soaring to around 70%, from around 20% the previous month. Dealers have been reluctant to sell options on such volatile names. "As volatility rose, appetite for that type of risk vanished," said a credit options trader in London.

In contrast, liquidity of options on the credit indices has soared, comprising almost all the USD2 billion in average notional traded every month last year. In May alone, volumes hit an estimated USD2.75billion. Options traders say they are comfortable trading either side of the index volatility game, but only one side of the single name market. "This will hopefully change," said one trading official.

06 Jan 2006