NEW YORK--Nasdaq OMX Group Inc. (NDAQ) plans to introduce a new
class of option contracts on U.S. Treasury bonds by the end of the
year, pending regulatory approval, the exchange operator was set to
announce Thursday.
The new options, expected to launch in the fourth quarter if the
Securities and Exchange Commission signs off, would allow investors
to wager on the movement in 10-year and 30-year Treasurys. The
contracts would make Nasdaq the only U.S. exchange operator
offering options tied to U.S. government bonds.
"This is designed to be an affordable and focused product for
"retail" investors to get involved in the Treasury space," said
Eric Noll, Nasdaq OMX's head of transaction services. "Traders
would be able to use this product in the same way as with
equities."
Nasdaq OMX said it aims to structure the contracts to allow
individual investors access to investing and hedging opportunities
on Treasurys similar to those available with options on stocks.
The product would have a value of $10,000 per contract,
according to the filing, and would be directly linked to either the
most recently issued 10-year or 30-year benchmark Treasurys. The
most recently issued Treasurys would be used because they are the
most liquid in the bond market, Mr. Noll said. Option contracts
would be offered with strike values in 50-cent increments.
Traders can currently use options to bet on exchange-traded
funds tied to bonds. These funds, such as the iShares Barclays 20+
Year Treasury Bond Fund (TLT) and ProShares UltraShort Lehman 20+
Year Treasury Fund (TBT), are tied to baskets of Treasury bonds,
and exercising option contracts on such funds involves shares of
the ETFs. The proposed Nasdaq options would allow more targeted
betting on a specific bond, rather than the movement in a basket of
varying maturities.
If a trader exercised Nasdaq's proposed options on Treasurys, it
would entail the right to buy or sell the underlying Treasury bonds
themselves, with each contract consisting of 10 bonds with a face
value of $1,000 each. For an investor that incorporates Treasurys
in an investment portfolio, the options could be used in various
hedging or income generating strategies.
Over the past month, TBT and TLT--the two most actively traded
Treasury funds in the options market--averaged a combined 110,000
option contracts traded daily.
Approval for a Treasury-based option product isn't
unprecedented. According to Nasdaq's filing with the SEC, the
Chicago Board Option Exchange Holdings Inc. (CBOE) and NYSE
Euronext's (NYX) Amex received approval to list and trade options
tied to Treasurys in 1981. Neither exchange currently offers such
products.
CBOE and NYSE did not immediately respond to requests for
comment.
Write to Kaitlyn Kiernan at kaitlyn.kiernan@dowjones.com
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