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January 12, 1998 12:00 AM

DERIVATIVES: COMPETITION IS FIERCE FOR EQUITY INDEX OPTIONS

Paul G. Barr
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    The sponsors of new equity index options are hoping mutual fund portfolio managers and retail investors will find them useful. Salomon Brothers Inc. and Lipper Analytical Services, both of New York, and the Chicago Board Options Exchange, created options that will be based on the Lipper/Salomon Growth Mutual Fund Index and the Lipper/Salomon Growth and Income Mutual Fund Index.

    The options might face an uphill fight, given the recent success of new options, and some options structure issues.

    Kenneth Farrar, managing director of equity derivatives sales for Salomon, said the options offer portfolio managers a better way to equitize their excess cash to a more relevant benchmark.

    The Standard & Poor's 500 Stock Index is not a "terribly relevant benchmark" for mutual fund managers, who often are evaluated relative to their peers, he said.

    Moreover, retail investors looking to hedge their holdings could be more likely to use the Lipper/Salomon options than retail-focused derivatives based on the Dow Jones industrial average or the S&P 500, he said.

    While investors are more familiar with the concept of mutual funds than they are of equity indexes, "you can't buy a put on Magellan," Mr. Farrar said, referring to Fidelity Investments' giant mutual fund. The new options are more closely associated with a mutual fund investment than with either the Dow or S&P, he said.

    Retail investors also will be able to effectively sell out of their mutual fund holdings at an intraday price, whereas selling mutual fund shares generally results in receiving a closing market price, Mr. Farrar said.

    But Robert Bannon, managing director with derivatives manager Analytic TSA Global Asset Management Inc., Los Angeles, said that because the underlying indexes for the options are priced only once a day, investors might be hesitant to use them.

    Mr. Bannon said it is harder for exchanges to find options that fill a real demand.

    "I think (the options) are a good idea, but it's been a long time since anyone's introduced a new option that worked," he said.

    Indexes underlying the options are calculated using the 30 largest funds in each Lipper category.

    On Dec. 8, the first day of trading, 4,200 options were exchanged.

    London, Chicago exchanges drop open-outcry link

    The London International Financial Futures and Options Exchange, London, and the Chicago Board of Trade, Chicago, dropped their open outcry linkage, in deference to the market's preference for electronic trading during off-hours.

    The link allowed selected LIFFE contracts to trade on the CBOT, and selected CBOT contracts to trade on LIFFE, during times when primary trading was not occurring.

    LIFFE's German government bond futures and options contract were traded on the CBOT when LIFFE's open outcry was closed, and likewise, the CBOT's U.S. Treasury bond futures and options contracts were traded in London when the CBOT's floor trading wasn't available.

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