With the stock markets recent ups and downs, new hedging or insurance financial listings increasingly are being put to use.
Futures and options on the VIX volatility index, options on the Russell 2000 exchange-traded funds, options collars related to the impact on equities of large moves in the London inter-bank offered rate, and put options on the S&P 500 are some of the strategies to which asset managers have turned of late.
Our options trading business grew 200% in 2007 compared with 2006. More advisers and asset managers have turned to options trades over the past two years. Their strategies are very conservative, its pure hedging. Previously, it was only hedge fund managers who were into options, said Jim Morrow, chief operating officer at Capital Institutional Services Inc., in Dallas.
More institutions are using options in a conservative strategy, and increasingly given the large movements we see in the stock market to protect their equity decisions from these wild swings, Mr. Morrow added.
For instance, William Clark, director of the New Jersey State Investment Council, which oversees $77.7 billion in pension assets, said in a monthly report issued on March 25 that the council used options collars to protect against violent moves in financial stocks. A collar involves being long in a certain stock, buying an options put and writing an option call positions that, combined, offset each others risk.
The financial sector has been particularly volatile amid the burgeoning mortgage crisis, punctuated by bombshell news such as the demise of investment fund Carlyle Capital Corp. or the sudden fall of Bears Stearns Cos.
We initiated a collar on roughly $500 million of U.S. financial services stocks by selling call options on a handful of individual names and purchasing put options on the XLF, Mr. Clark wrote in his report. (The XLF is an exchange-traded fund consisting of the financial services stocks in the S&P 500 index.)
Including our pre-existing puts on the overall market, we have put protection on roughly $1.3 billion of domestic equities, he wrote.