Equity derivatives players are looking to trade options on single-stock variance, in a step forward from options on index variance that were first traded last year (DW, 10/1). Hedge fund managers say Citigroup and Bank of America, which have been leading the market for index variance options, will likely be among the first to sell options on single stock variance. An official at Citi confirmed it was looking at these types of trades and an official at Bank of America declined comment.
The instruments could be useful to funds playing debt against equity, according to one fund manager. There could be a relative value play between a call option on a single stock's variance and a credit-default swap on the same name, he noted.
Hedging the trades could be a problem for derivatives houses, however, as the variance swaps used to hedge the options are less liquid for single stocks than for indices. One bank official said he thinks equity derivatives houses will find a way around this. "In this low volatility environment, people are prepared to explore all the opportunities," he noted.