Investors can for the first time purchase call and put options on bank stocks as a group.
The options, offered by the Philadelphia Stock Exchange, are on an index developed by Keefe, Bruyette & Woods Inc.
The index measures the performance of a geographically diverse group of 24 bank stocks, including New York's Citicorp, Ohio's Banc One Corp., and Florida's Sun Trust Banks Inc.
Trading began on Monday, and volume has been thin so far, with fewer than 400 contracts sold by midday Tuesday.
Demand Expected to Rise
But officials of the exchange expect volatility in the bank stock sector to spur demand for the product.
Options have been previously available on individual bank stocks. The new instruments enable investors to take positions on banks as a whole without having to buy individual stocks.
They also provide a hedge against sharp price movements in individual stocks. Another strategy is to use the option to make a bet on bank stocks versus another industry sector.
"We've been getting a lot of inquires," said Joseph Rizzello, a senior vice president at the exchange. "By and large, industry group indexes haven't been successful over the years, but they're gaining in popularity."
Hopes for a Liquid Market
He said inquiries have come from retail and institutional investors, raising hopes that a liquid market may develop.
Indeed, competition to provide bank options is already heating up. The Chicago Board Options Exchange has applied to the Securities and Exchange Commission for permission to trade in options on the Standard & Poor's 25-bank index. It may begin marketing them around the end of the year.
"I don't believe there is room for two bank indexes," Mr. Rizzello said.
Gain of 2% on the Year
Although it has not been available for trading, the Keefe index has been around since the firm was founded in 1962. Through August, the index had gained about 12% on the year, versus a 0.7% decline in the Standard & Poor's 500.
Late Tuesday, the index was trading at a value of 218.49, based on a value of 195 on Oct. 21, 1991.
"Over the past 18 months, bank stocks have outperformed overall market indexes by a factor of two to one," Keefe analyst John Works wrote in a Philadelphia Stock Exchange newsletter in March.
Since then, bank stocks have become more volatile investments, as institutions cash in gains, whipsawing the prices of several bank stocks.
"One of the dilemmas for traders who are trying to take advantage of consolidation in the bank market is, how do you hedge yourself against a selloff or spurt in performance for the whole group," said Felice Gelman, a bank analyst at Dillon Read & Co.
Weighing the Options
Investment strategies using new Philadelphia Stock Exchange/Keefe, Bruyette & Woods bank index. 1. Take a stance on bank
stock group rather than
individual banks 2. Hedge positions in
individual banks 3. Take a stance on
bank stocks versus
another industry group
- computers, for
example, or oil