European investors are increasingly using US-listed equity options for directional and volatility strategies, as they move away from traditionally favoured OTC products, according to a new TABB Group report.
The study, ‘European trading of US listed options 2014: Shifting demand in a changing market landscape,’ found European investors’ use of options has marginally decreased by 1% in the past three years, with asset managers representing a small but growing proportion of activity.
However, the use of US listed options has become more “sophisticated”, according to TABB’s head of derivatives research and author of the study, Andy Nybo.
“A broad range of European investors are actively trading in US options markets as deep liquidity and transparency coupled with ease of access enables a broad range of directional and hedging strategies,” he said.
All investors surveyed are picking options for hedging activities to manage directional exposures around corporate events, compared to 71% of respondents in a previous TABB study conducted in 2011. The use of options for volatility strategies has also surged from only 6% in 2011 to 62% in 2014.
According to the report, exchange-traded funds (ETFs) have become popular to hedge exposures, up to 70% in 2014 from 55% in 2011, and growth potential is expected to be strong.
“Investors love using ETF to hedge their portfolios,” Nybo said. “They can do notional trades in the millions very easily, but more importantly, they can get out quickly as well. It’s such a tight market, with a lot of liquidity on both sides of the bid and offer.”
Options on ETFs accounted for 36% in the US equity option markets in 2013. And last year, seven of the top 10 most actively traded options represented options on underlying ETFs.