David Silber is head of flow equity derivative sales at Citigroup Global Markets. He helps hedge funds make directional bets using options contracts listed on public exchanges.
The executive recently sat down with Traders Magazine to discuss the state of his business and how newer users of options are tapping options to achieve their alpha goals. We offer some excerpts here in this second part of the conversation. The first part with Nathalie Texeir-Giullot can be seen by clicking here.
Here, Silber says derivatives desks such as Citi’s can provide education and support services to asset managers in myriad products.
TM: You are seeing more nontraditional users looking to trade options?
Silber: Some of the users we see coming into the product are those who historically haven’t considered the options market. But it’s a lit market that allows them to get a handle on their P&L every day.
So they can really experience what something they bought is worth today and what it will be worth at the end of the day. We’re seeing a large increase in people who are coming from-not just the stock side-but more esoteric products such as credit. In many cases, it’s because of counterparty issues. And typically the listed options market is less sophisticated or complex than the product they are coming from.
TM: What products are they interested in?
Silber: The incoming call is rarely about traditional listed equity options on single stock. It’s almost exclusively about the VIX (the CBOE Volatility Index). Normally at the level of the portfolio manager. These are people who have not been in the listed derivatives market. They’re drawn to it due to the VIX.
At times that might lead to them looking at SPX (the SPDR S&P 500 Index option). Which ultimately might lead to them looking at SPY (the S&P 500 Index ETF option). Which might lead to them looking at XLE (the Energy Select Sector SPDR ETF option).
But the benefit of the product to the listed derivatives market is so much greater than just the volume that trades in the VIX.
TM: Some education is necessary?
Silber: We do quite a bit of education around the product-the mechanics of the VIX. We spend a lot more time with portfolio managers and analysts, as opposed to execution traders than we used to. We host a lot more conference calls around events to educate people. Whether it’s the VIX at a low or other events, such as the launch of the minis (10-share mini-option contracts). We do a lot more things around education.
TM: So, it’s not just hedge funds anymore.
Silber: There used to be a very small group of hedge funds that dominated the equity options business. I don’t think that is the case at all anymore. It’s much more diverse. By strategy as well as frequency of trading. Plus, there is much more overlap between traditional clients who would only trade OTC now looking at listed and listed clients looking at OTC.
