Maybe Investors Love Credit Index Options a Little Too Much
Barclays says all that activity could spark a "tail wagging dog" situation
Here is a dog wagging its tail.
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Options on indexes made up of credit default swaps (CDS) have been a sleeper hit over the past few years.
While trading indexes comprising CDS tied to a basket of corporate names can give investors a cheap and easy way to trade corporate credit at a time when the cash market is said to be illiquid, options written on those same indexes can do one better. The options give investors the right to buy or sell CDS indexes, such as Markit's CDX or iTraxx series. It's particularly useful since options—by definition—give investors additional leverage. That means they can amplify returns from corporate credit or offer a cheaper way of hedging for a big blow-up event in bonds than simply buying CDX protection itself.